The market’s recent chatter has revolved specifically around whether the strength in the jobs figure from last week moves forward the expected timing of the first interest-rate hike from the Federal Reserve.
The answer: yes, but probably by not that much. Jobs growth of 288,000 for June was better than expected, and that 6.1 percent unemployment rate looms large for those who figured the Fed would be ready to start raising rates after at least 6.5 percent was surpassed. So we’re there on that, but as Kristina Hooper of Allianz points out, the wage growth seen hasn’t been terribly strong, and the types of jobs being created – a lot of which are in lower-paying industries like retail – don’t portend the same kind of economic strength that might have been manifest by now in other iterations of U.S. recoveries.
So there was some hoopla on Monday over a prominent economist like Jan Hatzius shifting his “first rate hike date” figure dramatically. In moving from early 2016 to late 2015, he’s really only joining the consensus here on this. With the Fed meeting minutes due out on Wednesday, considerable attention will be paid to how the Fed is now viewing the economic situation, particularly given their penchant for a go-it-slow approach.
High rates are the hallmark of the increasingly bizarre debt situations engulfing both Puerto Rico and Argentina. The two nominally couldn’t be more different – one a sovereign nation that defaulted 12 years ago and yet still has created enough drama to fill a lifetime of Chekhov, the other a commonwealth and a territory of the United States.
The former for years was a no-go zone for anyone who likes their debt holdings boring. The latter was a celebrated gathering place for muni buyers because all of the island’s debt was tax-free, so New Yorkers and Californians alike could jump into the fray there.
What’s notable as well is the way in which there are bifurcations now in both situations.
In Puerto Rico, debt that had been expected to have a quasi-guarantee from the government or the Government Development Bank of Puerto Rico, like its electric company or sewer utility bonds, are now cast adrift. They are floating in the wind and seeing their bond prices drop to somewhere around 35 to 40 cents on the dollar, while the more protected general obligations are trading at something more normal (but still not all that awesome) 80 to 85 cents on the dollar.
The recent passage of a law that lets the corporations “restructure” has now brought in distressed players and hedge funds – kind of the exact people the Argentines found themselves in bed with after their restructuring took place and led to the imbroglio that they’re now involved in. They can’t pay their restructured holders, but send money to the custody bank anyway to seem like they have the intention to pay were it not for a meanie of a judge (nobody has used the word “meanie,” and he’s probably a lovely man who likes dogs and kids). And if they do pay the holdouts too, they open another can of worms, a $15 billion can of worms (their numbers). The latest development is that the Argentines asked a mediator to stay the judge’s ruling, which is kind of their 20th run at this.
Has Puerto Rico created a similar mess here? The Barclays Muni High Yield Index suggests so. Or as Dan Burns, Reuters Americas markets editor, points out, it was up 9.5 percent year-to-date on June 11, and now it’s just up 5.7 percent, with all but 0.2 percentage point of that retracement having taken place since the restructuring laws surprisingly passed about two weeks ago. The stock market has taken notice too, as MBIA Inc, one of the guarantors of Puerto Rico’s “corporation” debt, has seen its stock fall more than 19 percent since the law’s passage on June 25, while Assured Guaranty, considered a bit less exposed, is down 11 percent in that time period.