Just add that interest payment to principal. We good with that?
October 14, 2024
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–Yields eased Friday led by front end. 2y down 5 to 3.94. 10y down 2.3 to 4.07 and 30s down just 1.2 to 4.38 as sentiment shifts on the long-end. Similar with SOFR curve: reds +6.75, greens +4.5, blues +2.375 and golds only +1.5. I marked 10 year breakeven at 233.3 bps, a new recent high; inflation expectations are edging higher.
–FFX4 settled 9534.5. 25 bp cut at the Nov 7 meeting should be 9536.2 and 50 bp cut 9555.3. Meeting is Nov 7. Seven days of a 30 day month is 0.2333, so a 25 bp ease will only be worth 0.7666* 25 for the contract. 3-month SOFR compounds daily but FF contracts are a simple average of EFFR over the contract month.
–2007/8 GFC was about the household sector and mortgage/housing overextension. Now it’s the same dynamic with the US gov’t. However, FT runs this headline: Corporate Debts mount as credit funds let borrowers defer payments. “Use of payment-in-kind loan terms is growing as companies struggle with heavy leverage and high interest rates.”
PIK typically used by private creditors. Why does the futures market work? Because contracts are marked to market and cash flows transfer EVERY day. PIK is on the other end of the spectrum and can lead to cascading credit problems. As I personally know from Refco, calling an unpaid debt (which will never be paid) an “asset” can backfire. There’s been a lot of talk about borrowers having “termed out” debts. For homeowners with 30y mortgages it’s true. But for corporates, that window is now about 4 years ago. The five year roll is coming up. I’m guessing that’s part of the urgency for the Fed to lower rates. Risk a little inflation or watch already increasing bankruptcies surge? I’ll take door number 2, Bob.
