This page has been archived and commenting is disabled.
UBS: The Great Rotation Is Much Ado About Nothing
Authored by Matthew Mish, UBS Strategist
The Great Rotation debate: much ado about nothing?
The concept of the Great Rotation continues to garner significant investor attention. From a flow perspective, our own analysis and those of our colleagues across various asset classes infers there is scant evidence of a large rotation out of corporate credit or fixed income in general. In our view, the outlook for investment flows must consider both the flow and stock perspectives. To that end, we look to the corporate and foreign bond holdings as reported by the Federal Reserve’s Flow of Funds data as a barometer for market holdings given the depth of disclosure and importance of US markets in global indices.
The Fed Flow of Funds data reports total amount of credit market debt outstanding is $55tn, of which the largest shares include $13tn in mortgages, $12tn in corporate and foreign bonds (foreign bonds are bonds issued in the U.S. by foreign borrowers through U.S. dealers and purchased by U.S. residents), $11tn in Treasuries and $7.5tn in agency and GSE-backed securities. The mortgage market was the last decade’s story. From 2000 to 2007, total mortgages outstanding rose from $6.7tn to 13.5tn. Since 2007, mortgages have fallen from $14.5tn to 13tn as declining holdings of ABS issuers and agency & GSE-backed mortgage pools have been largely offset by rising GSE holdings. The focus of the current debate within fixed income is more concentrated on corporate and government debt. Charts 1, 2 and Charts 3, 4 depict the growth in total debt outstanding for both sectors, respectively, broken down by, first, assets held by financials, rest of world and households and, second, sub-segments within financials.
From 2000 to 2007, total corporate debt increased from $4.8tn to $11.5tn, with outsized accumulations in rest of world and household holdings (Chart 1). Since 2007, corporate debt has risen incrementally to $12tn, with larger gains in financial business holdings. Mutual fund holdings have increased 91% to $1.7tn, while funding corporation assets have grown 643% to $0.9tn (Chart 2).
Conversely, money market assets have plunged 75% to $0.1tn, broker dealer holdings have fallen 56% to $0.2tn and private depository institution assets have declined 31% to $0.8tn. In total, the largest holders of corporate bonds are the rest of world ($2.4tn), life insurers ($2.1tn), households ($1.9tn) and mutual funds ($1.7tn).
In comparison, Treasury securities outstanding grew from $3.3tn to $5tn from 2000-2007 (Chart 3). Since 2007, Treasury debt has surged to $11.2tn, with outsized (relative) gains in household assets and large (absolute) increases in rest of world and financial holdings. Household holdings have risen 368% to $1tn, private pension assets have grown 172% to $0.5tn, and money market holdings have gained 156% to $0.5tn (Chart 4). However, the largest holders of Treasury securities are the rest of world ($5.4tn, roughly 70% of which are global central banks) and the Federal Reserve ($1.6tn).
Finally, corporate equities outstanding increased from $17.6tn to $25.6tn pre-crisis (Chart 5) and, since 2007, have not changed. Amounts are reported at market value, whereas fixed income values are reported at par value. Exchange-traded fund holdings have risen 83% to $1tn; in nominal terms, the increase roughly offsets the 9% decline to $5tn in mutual fund assets (Chart 6). Private pension holdings have fallen 16% to 2.3tn, while rest of world assets have increased 23% to 3.5tn. The largest holders of corporate equities are households ($9.9tn), mutual funds ($5tn), rest of world ($3.5tn) and private pensions ($2.3tn).
In summary, we would make a few simple observations.
First, we believe the thesis of a great rotation out of Treasury securities into corporate equities is a fallacy. The Federal Reserve and global central banks are the dominant holders of Treasuries; if they decide to sell, the money will not directly flow into equities.
Second, the thesis of a great rotation out of corporate credit into equities is complicated by three main cross-currents:
- First, the largest holders of corporate credit are a diverse bunch: rest of world investors typically pursue U.S. corporate assets for reasons other than price, namely diversification and liquidity benefits. Life insurers have income targets to meet and regulatory restrictions limit the capacity for equity investments. Both groups appear unlikely to unwind credit positions.
- Second, whilst household and mutual fund holdings could be less stable than institutional holdings, selling from households and mutual funds we believe would require the macro environment to shift significantly: either interest rates would have to rise materially (presuming global central banks will allow this to occur) or a series of unexpected shocks would need to cause a spike in market volatility, which would negatively impact high yield but high grade less so. We would note that at least one-quarter of high yield assets are directly held by hybrid funds, which can allocate between high yield and equities.
- Third, given different majority holders across fixed income and equities and investor allocations increasingly driven by regulation, new allocations to equities driven by income gains and greater consumer confidence would seem to be a more probable scenario.
In short, perhaps the Great Rotation debate is much ado about nothing?
»
- 10249 reads
- Printer-friendly version
- Send to friend
- advertisements -
Fuck you UBS!
Ultra Bent Swindlers.
Love the charts.
Purple and Magenta (charts). Rain or Bernanke, My homework will be in on time.
Rule number one for Wall Street (CNBC) talking heads. When you don't know what you're talking about, but you want to give the impression that you do know what you're talking about, talk about what everyone else is talking about.
Thus we have "The Great Rotation".
i was going to say "sex" actually...fine "Great Rotating thingy" it is. No wonder their ratings have collapsed. http://www.virtualworldlets.net/Shop/ProductsDisplay/VRInterface.php?ID=3
"yet another thing the FCC (?) killed." God forbid if they ever regulated the media of course. then people might actually start watching "something other than something that is completely verboten." a product demonstration on CNBC...or other news affiliate...would do wonders i think for all parties concerned...don't you agree? "and we will now run program alpha centarii maximus right....now. How is working Maria B?" guaranteed "most watched television show in history" methinks...
@Cognitive Dissonance
I ran across this a few weeks ago - http://www.businessinsider.com/meaningless-phrases-that-sound-smart-on-c...
It's a fun read if you have a few minutes.
Yea, that's a good one. I always wondered how high up the ladder you have to get on Wall Street before you get access to the Bullshit Generator. I hear Goldman tried to patent it, but, their application was rejected as bullshit. Guess it just comes naturally to them.
The Bull By The Balls Dow Jones Industrial Average Chart
http://chartistfriendfrompittsburgh.blogspot.com/2013/03/the-bull-by-balls-dow-jones-industrial.html
Don't for get the POMO> Friday Ramp-A-Thon. That T-10 and earlier T-30 uptake smells of Stagflation.
still smells of "Mr. Bond" to me. http://en.wikipedia.org/wiki/Jack_the_Giant-Killer you will not get an argument from me that there in fact exists an actual deflation. "make money dear and bankruptcy common" is not anything new in the States however. the Banker only wants to get his money back. he doesn't need to worry about the existence of money 'per se.' Governments on the other hand SHOULD be focused on only such a thing. since by definition "there is more than one way to skin a cat" in the world of economics "prepare for something off the wall" always. the goal is always the same though: "that which creates NEW money is always treated best." by definition inflation does not do that actually...nor stagflation either. "growth as defined by a higher stock price" does however. but your "debt management" must be exceptional. http://www.businessweek.com/news/2013-03-14/california-said-to-raise-bon...
it appears that with higher stock prices "comes competition for money in the form of total return." (principal + interest) as with a war machine there might not be a way to turn of "the debt machine" either. since equities provide investors with WORKING capital in the form of an industrial plant, an oil well or a "market cornering device" (Microsft Windows, Google's search engine, Oracle's total database solution) this gives the "capital formation people" a big leg up in the race to provide a competitive return ON capital and not just return OF capital. "not all are created equal" however...and again "i recommend an expert in the field" when your talking stock picking. great stock pickers are made not born. my list of great equities is long...and growing...actually.
The muppets WILL comply with Dept of Central Planning orders to 'rotate into equities' even if it takes gunpoint to do it.
For equities if the cost of capital is less than the dividend there will be many share buy backs. Lets see money gets printed and buys bonds. Credit gets issued and goes to share buy backs. Share price goes up but share count goes down. Earnings go down and P/E ratios go up. So where is the room for a rotation?
Anyone for IPOs to see if the rotation model can work.
They would like everyone to believe there is a rotation into equities to get them to rotate into equites.
Dream on Mother Fuckers!
well here is one sweet example :
Mila Kunis Just Moved From Cash Into Stocks - Business Insider
Those twins peaks are rotating or so she says!
There can be no doubt that the govt. can create public debt, but extinguishing debt is quite another matter other than monetizing it which in fact is just a slow form of repudiation. The govt. can create wealth by selling mineral rights on federally owned land, but just as oil companies recognize that it is a one time event by claiming depletion allowances so is the govt. depleting our natural resource treasures though they never acknowledge it.
wake up to energy issues.
Increases in enegy costs have always been the trump card, able to crush everything else, even central bankers .....
Natural gas is jumping ... inventories, suddenly in the past three weeks, have dropped from all-time highs to below average .... this is now fertilizer season and with food demand and ethanol demand at all-time highs, and a nice cover of snow promising no drought this season, farmers are fertilizing for corn like never before ... and fertilizer, folks, is made from natural gas ....
Oil is not far behind .... Saudi Arabia has the propaganda cover that increased US production "allows" them to cut their production, but the truth is that ghawar, the "king of kings" of oil fields, is finally playing out, running on fumes ... and in the US, fracked wells are not all they are cracked up to be (sorry for the pun), but play out far faster than the analysts anticipated .... the drillers in ND, Montana and Sasketchewan have to drill at a feverish pace now just to keep their production even (red queen scenario), they are near peak and could start dropping off soon, even with all the new drilling going on .... meanwhile the old, conventional fields from GOM to the North Slope, all continue to gently decline ....
the rest of the world continues to hunger for coal .... still the most abundant and far and away the cheapest energy source ever discovered .... the niceties of "greenhouse gas global warming" doesn't matter much when you are cold and poor ... anyway, more carbon dioxide in the air just makes the planet greener, mostly ....plants love CO2 ....
here comes the next wave ov energy price increases ... and guess what that will do to Apple smart phones .....and dreamliners ... and hollywood movies ....and balanced budget initiatives ... tsk ....