Libor-OIS Blowing Out On Rising Repatriation Concerns, Collapsing Front-End Funding

While trader attentions have been focused on more conventional risk indicators like equities, yields and bonds spreads in the aftermath of the February VIX eruption, a less followed - if perhaps far more informative indicator - the USD Libor-OIS spread has been blowing up, widening to 32.7bp - the most since last Feb. 22 - as Libor sets higher for the 11th straight session, while commercial paper rates for financials are also rising as more issuers have been selling longer-dated obligations, and moving closer on the curve.

So is there another dollar shortage quietly forming behind the scenes?

As it turns out, the answer may be yes, and the culprit is the same "echo taper" discussed here last year (and recently by Credit Suisse's Zoltan Pozsar) , when we commented on the impact repatriation would have on rates, and especially the front-end.

Overnight, Bank of America reminds us that one of the biggest stories of 2018 for high grade credit is overseas cash repatriation as part of tax reform.

It is such a simple - yet powerful - story. During the ongoing 4Q earnings season we have now heard from most of the largest holders of overseas cash.  Although specific plans are obviously "work in progress" some clear patterns have emerged.

Among the most notable "pattern" is that a big decline in debt issuance volumes is implicit throughout - for example in AAPL's decision to bring their $163 billion net cash position to zero, and in some cases explicit like JNJ's statement that "we'll no longer need to borrow for US purposes".

This makes intuitive sense: after all, until the passage of the repatriation holiday, company had to issue bonds domestically to fund dividends and buybacks (ostensibly collateralized by net offshore cash). That will no longer be required as company can simply use offshore cash brought back to the US to engage in shareholder friendly actions.

Another aspect of the corporate "echo taper", is that a number of companies plan to also pay down debt including KO, which said this week that "the company plans to reduce its gross debt by approximately $7bn with cash currently held overseas" and AMGN's statement that "we could find it prudent to pay some upcoming debt maturities in cash rather than refinancing in the market".

Here BofA adds that one thing not announced -yet - is companies announcing plans to tender for existing bonds, although that could still be consistent with management guidance in many cases such as KO and AAPL.

The big implication here is that as hundreds of billions in offshore cash return to US soil, corporate America is set for a significant round of gross (if not net) deleveraging amid rising rates and growing interest expense.

There is another major aspect of overseas cash repatriation, and it has to do directly with the abovementioned blow-out in the Libor OIS as financial markets are now losing one of the biggest providers of funding in the front-end. This is certainly the case in the corporate bond market, but also the commercial paper market, money market funds, CDs, securitized products and other fixed income asset classes.  This was explained last October in "Why US Tax Reform Will Put Even More Pressure On Dollar Funding Markets."

As BofA's Hans Mikkelsen writes, "it is impossible to overestimate the importance of this story and we are seeing the effects already in a number of ways."

First, we think liquidations the past two weeks of 1-3 year paper in the corporate bond market is to some extent driven by this story (liquidations from foreign investors are possible too and the cost of dollar hedging is too high).

We are also seeing stress in the commercial paper market, 2-year swap spreads and LIBOR-OIS and one of the derivers we think is the overseas cash repatriation story. We continue to expect wider credit spreads in the front end of the curve

With the Libor-OIS spread about 10bps tight of its recent record wides, we expect even wider front-end spreads as funding, and liquidity, fade. What happens once the Libor-OIS hits the 40bps range remains to be seen, however traditionally when front-end funding metrics have been that stressed, something has usually snapped, first in the unsecured rate market, and from there, all other risk assets.

It will be painfully ironic if Trump tax reform, seen by virtually everyone as a slam dunk for higher stock prices as a result of the hundreds of billions in stock buybacks it enables, ends up being just the catalyst that breaks the market by soaking up most if not all of that so very critical front-end monetary lubrication.

Comments

karenm Wed, 02/21/2018 - 15:59 Permalink

Of course it will, and not because "Trump was betrayed or duped"

 

But because, nothing can go up forever, and the time to fall is now.

 

Which Trump knows full well, it's his role in the great Pantomime

Endgame Napoleon karenm Wed, 03/21/2018 - 12:05 Permalink

The article said that the repatriating companies would be less leveraged. They would be able to sustain their American business expenses, like dividend payouts, from the repatriated cash. With high interest rates, it does not sound like they will create many jobs, though. The repatriation is still good; it makes the companies more solvent. No? 

In reply to by karenm

pitz Wed, 02/21/2018 - 16:07 Permalink

Shouldn't be any meaningful USD$ flows associated with 'repatriation'.  Nearly all of the 'money' is already in USD$, already invested in the US economy, directly or indirectly.  The only reason it needs to be 'repatriated' is that title to the money is held by a foreign subsidiary and such tax is pre-tax.

It is very wrong to suggest that the 'offshore' funds are not already on US soil.  

Endgame Napoleon pitz Wed, 03/21/2018 - 12:14 Permalink

Oh. Well, did you know that tax revenue is down in the USA since 50 million American citizens are out of the workforce? Half of the employed are part-time workers, earning on-average $13,000 per year. Billions per year are sent out of the country in remittances due to our mass-scale, welfare-subsidized legal / illegal immigrant workforce. That money, bound for foreign countries, is not spent in US businesses, helping to generate jobs and tax revenue. It would be better to bring the 2 million off-shored jobs and potential SS contributions home, rather than just getting more tax revenue from tax havens, but then, the country has amassed trillions in debt. And there is the latest tax cut / tax-welfare program to finance. It is kind of symmetrical to finance it with tax-haven money. 

In reply to by pitz

wonger Wed, 02/21/2018 - 17:04 Permalink

The reason any price moves is because it benefits the Jewish Banker holding positions against the majority who trade with common sense thus lose money, simple as that, any other explanation is as retarded as Gartmans trades! 

Nelbev Wed, 02/21/2018 - 17:53 Permalink

This is stupid, "overseas cash repatriation as part of tax reform" as the money may not be overseas and that does not matter anyways.  It could already be in US dollars in a US bank account.  It is just that the foreign subsidiary has title to the bank account making it not repatriated under prior tax law like unrealized capital gains.  Next stupid thing would be someone claiming bringing all that money home will effect the price of dollar.  In reality, large US multinationals have to cough up a wad of cash for their tax bills and pay up, abet payments graduated, but then face a lower tax rate down the road.  Unfortunately when dumb llbtards with their art and gender studies degrees tell me that corporations have to pay their fair share, aka more, I can not tell them anymore that the US has (now had) the highest corporate tax rate on planet which the dumb asses did not know.

Theeconomist Wed, 02/21/2018 - 19:01 Permalink

This will only affect bankers' incomes, and otherwise is a nothingburger, for the same reason that "offshore cash" is inconsequential.

Apple loans out that offshore cash and earns interest on it, and then turns around and borrows in the US, paying the interest it receives on the loans it takes.  As a result, in a global financial market, "offshore cash" never had any effect because they can just borrow it here without any real effect.  In fact, Apple can probably borrow more cheaply than other companies, meaning Apple made out on the deal, as they were loaning it out at a higher rate then they were borrowing it.

Endgame Napoleon pitz Wed, 03/21/2018 - 13:44 Permalink

Oh. It sounds like Apple was able to loan money to other businesses by keeping the money in an off-shored account, possibly due to some interest arrangement. The logistics of switching to an on-shore account are funny. According to this article, the off-shore and on-shore accounts are located in same Midwestern state. 

https://ftalphaville.ft.com/2018/01/18/2197758/the-apple-story-is-about…

 

In reply to by pitz

Endgame Napoleon Theeconomist Wed, 03/21/2018 - 13:26 Permalink

So, American banks made money on the interest from loans to Apple that banks lose under the repatriation due to the fact that Apple can pay its US expenses with the repatriated cash? 

Did those loans generate tax revenue? I guess extra banking jobs were created to generate and service those loans to Apple.

Tax revenue in the USA is down due to mass-scale underemployment of citizens. https://mises.org/wire/danger-federal-tax-revenue-growth-falls-80-month…

  1. 50 million American citizens of working age are out-of-the-workforce;
  2. Half of employed-in-name-only people work part time with an on-average earned income of $13k;
  3. Half of men ages ages 18 to 34 live with their parents due to rent that absorbs more than half of their earned-only income. http://davidstockmanscontracorner.com/the-everything-bubble-waiting-for…

 

A massive slice of the tax base is not contributing much to boost tax revenue in a country that is trillions in debt.

So, the tax havens meant no loss in tax revenue, mathematically speaking. Okay. Fine. What the USA really can’t afford is the offshoring of so many jobs. The US Treasury loses the tax contributions as well as the jobs.

One solution of [Elites] is for government to pay citizen and non-citizens parents, working in the crappy service sector jobs that replaced the off-shored manufacturing jobs, to have sex and reproduce.

Note: These elites ARE the math people in some cases. In other cases, they are lawyers—lawyers elected to work in the US Congressional Swamp. 

Only problem: These fake  “taxpayers” do not earn enough to pay income tax and cannot earn more since they will exceed the earned-income limits for a range of pay-per-birth monthly welfare programs that cover their rent, groceries and other household bills.

Far from contributing to the tax till, many womb-productive, single-earner moms, working part time to stay below the earned-income limits for other welfare, and hordes of legal / immigrants with US-born children and male breadwinners, are paid by the US Treasury Department for having sex and reproducing.

This cash-assistance welfare up to $6,431 for maximum womb productivity is called their “taxes” by many of them. It is called a refundable child tax credit / earned income tax credit in the Swampers’ doublespeak dictionary.  https://www.irs.gov/credits-deductions/individuals/earned-income-tax-cr…

Tax revenue mostly comes from decent jobs.

It would be better for Apple, and the many other American manufacturers in Asia, to bring over 2 million jobs (and SS contributions) back home, charging a little more for the iPhones we buy. We buy those phones on payment plans, anyway.

This would create 2 million additional taxpayers, as the huge Baby Boom retires, likewise helping to shore up the tax base and pay down the gargantuan deficit. 

Maybe, Apple will never do it since people would not pay more for their X phone. I have read studies that claim it would not cost that much more to manufacture those things here, but maybe, those stories were written by liberal arts types—probably were.

In reply to by Theeconomist