Hey buddy, can you borrow me $30 billion?
January 5, 2023
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–Thursday’s data related to the labor market was solid. Jobless Claims just 202k, ADP 164k, about 40k more than expected. Yields rose across the board, with tens up 8.6 bps to 3.991% and 30s up 8.5 to 4.138%. On the SOFR strip, reds through blues were down 10 to 11.5.
–Today of course, brings the payrolls report. NFP expected 175k from 199k last. Unemployment rate expected 3.8%. Extreme whiplash is possible if the data were to show much weaker labor conditions, as the market appears to have taken a hard lean favoring higher yields. One of the leading headlines on Bloomberg this morning cites a buy of 20k TY week-1 (today expiry) 111p for 2 as an omen for a possible jump in yields on Friday; this play is termed “notably aggressive” with a premium outlay of $625k. That strike is about 15 bps away from TYH settle. I’m a fan of Ed Bolingbroke, the author, but in the big picture, this isn’t much of a trade. What I might note is that Friday-week2 TY options added 127k in open interest yesterday; next week encompasses auctions of 3s, 10s and 30s. Yes: there IS demand for protection against higher yields.
–Of more interest to me was a late story on BBG:
“The California State Teachers’ Retirement System, the country’s second-largest pension fund, may borrow more than $30 billion to help it maintain liquidity without having to sell assets at fire-sale prices, according to a new policy its investment committee will consider this month. “
CalSTRS, at about $320 billion, is the largest teachers’ retirement system and the second largest public pension fund in the nation. My immediate conclusion, likely unfounded, is that this fund has a LOT of assets that are underwater, and the scramble for liquidity represents a search for a life raft. Of course, I’ve seen several stories recently about commercial buildings in CA selling at half of previous prices. Is 50% off a “fire-sale”? Spending a little premium to lock in borrowing costs might seem prudent…
There’s another headline from Pensions and Investments regarding CalSTRS; here’s a clip:
“The Institutional Limited Partners Association, Council of Institutional Investors and 11 public pension funds, including CalSTRS, have filed an amicus brief in federal court supporting the SEC in a lawsuit brought by industry groups seeking to overturn a new SEC rule requiring increased disclosure from private fund advisers and prohibiting certain fee arrangements.”
–This too, is a bit interesting. CalSTRS supports increased disclosure by private equity. Not that a fund like CalSTRS could ever find itself as the victim of a charlatan investment scheme…right? No. Of course not. In fact, according to the website, *since inception as of June 30, 2023, the return of the Private Equity portion of the portfolio is 13.39%…not bad. However, when looking at the holdings, a lot of investments were made in 2020 or prior. So I don’t think that is an annualized return. But, let’s say it is. Total return in the year ended June 2023 is 6.3%. Was private equity more than double? Maybe.
–I am completely out of my depth in analyzing a portfolio like this. What I do know, is that trying to borrow $30 billion all of a sudden after a massive run-up in equity prices at year end is a red flag. Or, maybe it’s just prudent cash management (to borrow at the highest short-term rates in a generation). Increases in borrowing at the Fed’s BTFP are another marker. This Fed program supposedly ends in March. it won’t.
–The discussion of soft- or hard- landings revolves around exactly these types of issues. A given zombie can hold it all together for a while if funding was locked in. The demise of a few companies or funds is no big deal, the system can absorb it. Where’s the tipping point? I’m not saying that Powell knows, but if he thought the Fed was pushing that point a little closer, he might pivot…
https://www.calstrs.com/investment-portfolio#:~:text=CalSTRS%20is%20the%20largest%20educator,November%2030%2C%202023%E2%80%8B%E2%80%8B.
| Investment portfolioCalSTRS is the largest educator-only pension fund in the world with assets totaling approximately $317.8 billion as of November 30, 2023.www.calstrs.com |
https://www.calstrs.com/private-equity-portfolio-performance
https://www.pionline.com/regulation/ilpa-calstrs-among-those-backing-secs-private-funds-rule
| ILPA, CalSTRS among those backing SEC’s private funds ruleThe ILPA, CII and pension funds, including CalSTRS, filed a brief supporting the SEC in a case seeking to overturn a rule requiring more disclosure from private fund advisers.www.pionline.com |
| Private Equity Portfolio performanceCalSTRS uses the dollar-weighted internal rate of return (IRR) to measure portfolio performance, as recommended by the Association of Investment…www.calstrs.com |
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ILPA, CalSTRS among those backing SEC’s private funds rule
The Institutional Limited Partners Association, Council of Institutional Investors and 11 public pension funds, including CalSTRS, have filed an amicus brief in federal court supporting the SEC in a lawsuit brought by industry groups seeking to overturn a new SEC rule requiring increased disclosure from private fund advisers and prohibiting certain fee arrangements.
