The Daily Basis Point

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1 WEALTH SOLUTIONS GROUP The Daily Basis Point The Daily Basis Point is a forecast-free, painstakingly-assembled and frequently colorful compendium of fixed income market data and commentary. The DBP includes Treasury, corporate bond, municipal and global market information, economic commentary and occasional marketrelated lagniappe. PWM Fixed Income Research Dave Violette, CFA Senior Fixed Income Analyst June 7, 2018 Treasury Yields: Yesterday, unlike equities which seem they are just pre-ordained to do what people want them to do (volatility just seeps out of equities the VIX has turned the clock back to January), yields began the day inconspicuously nearly unchanged but they just kept marching unidirectionally higher and higher without any tangible reason. It even had me digging out my 3.0% hat again (everybody else around here are sporting their Dow 25k hats for the 6 th time since Jan). It wasn t a magnificent move in magnitude but the consistency was. 2 s +2.4 bps, 5 s +4.1 bps, 10 s +4.4 bps and 30 s +3.8 bps. One of the drivers was the steep sell-off in bonds in Euro land it is a tethered globe after all. Today, once again with nothing on the docket for data Treasuries will be left to the devices of risk sentiment etc. Yields are up marginally at the moment as green emanates once again form equity markets. FYI I mention again the trifecta of central bank meetings next week (FOMC, ECB, BOJ) potentially setting up for more volatility. BTW the FOMC will raise the Fed Funds Rate. FOR INTERNAL USE ONLY Page 1 of 7

2 Volatility Corner: VIX (historical): FOR INTERNAL USE ONLY Page 2 of 7

3 Corporate Credit: Yesterday: Corporate Curve: Corporate Credit Rating Changes: JC Penney Corp.: Moody's downgrades J.C. Penney CFR to B2 from B1: Moody's Investors Service, ("Moody's") today downgraded Penney (J.C.) Company, Inc. ("the company, J.C. Penney") Corporate Family Rating to B2 from B1. Moody's also affirmed Penney (J.C.) Corporation, Inc.'s ("the Corporation") senior secured ABL Revolving Credit Facility at Ba2 and its senior secured term loan and senior secured notes were affirmed Ba3. The Corporation's secured second lien notes were downgraded to B3 and its senior unsecured notes were downgraded to Caa1. The rating outlook is stable. The company's SGL-1 rating has also been affirmed. "The downgrade reflects the continued weakness in operating performance coupled with the uncertainty in its strategic plan given the recent departure of its CEO", stated Vice President, Christina Boni. "Although the company has opportunities for further improvements in merchandising, sourcing and operations as well as very good liquidity, significant headwinds remain. J.C. Penney must close the FOR INTERNAL USE ONLY Page 3 of 7

4 operating performance gap with its department store peers, as well as manage weak mall traffic and continued market share gains by off-price and online retailers." J.C. Penney's credit profile is supported by the company's very good liquidity profile with total liquidity of approximately $2.0 billion ($181 million of cash and $1.86 billion of undrawn revolving credit commitments as of May 5, 2018). We expect the company will generate positive free cash flow of over $150 million over the next 12 months. Debt/EBITDA is estimated to be around 5.8 times as of fiscal year-end Although the company has recovered a portion of its lost market share, recent challenges suggest that further progress will be at a much slower pace. Ongoing merchandising and operational efficiencies should support margins over time. The credit is constrained by the structural challenges facing the department store segment, which include market share losses to off-price retailers, weak mall traffic, and the cost of investments associated with managing consumer preferences for online shopping. The stable rating outlook assumes that J.C. Penney will continue stabilize both sales and operating margins as it prioritizes debt reduction. Muni Bond Market: Barclay s Muni Index closed at 2.68% -0 bps. FOR INTERNAL USE ONLY Page 4 of 7

5 10 yr AAA GO Ratios: 82.8 From Bond Buyer/Bloomberg Brief: High-grade munis were mostly weaker, with yields calculated on MBIS AAA scale rising as much as one basis point in the one- to three-year and 11- to 20-year maturities and falling as much as one basis point in the four- to 10-year maturities. Puerto Rico Bond Prices Jump as Agents Strike a Deal: Prices on Puerto Rico sales-tax bonds jumped to the highest in more than a year on anticipation that a dispute over sales-tax receipts repaying the debt will be resolved. Commonwealth sales-tax bonds with a senior lien maturing in 2057 traded Wednesday at an average price of 74.8 cents on the dollar, highest since April 2017, data compiled by Bloomberg show. Subordinate salestax bonds maturing in 2041 traded Wednesday at an average price of 35.6 cents on the dollar, also the highest since April 2017, Bloomberg data show. The debate over the sales-tax revenue is a key issue in resolving Puerto Rico s record bankruptcy. Two court-appointed agents that have been fighting a months-long legal battle over the sales tax cash asked U.S. District Court Judge Laura Taylor Swain to delay ruling on their dispute for 60 days as the parties reached a tentative deal, according to court documents filed late Tuesday night. This is an enormously significant development, Swain said Wednesday at the start of one of her regularly scheduled court hearings in San Juan. Dedicated sales-tax revenue repays the bonds, called Cofinas. Puerto Rico, which is struggling to end a decade-long recession and rebuild after Hurricane Maria, claims it has the right to use those sales-tax receipts to cover expenses. We are not at the finish line yet, said Luc Despins, lead lawyer for the agent representing the commonwealth s argument that it owns the sales taxes, and therefore can use the money for expenses. Prices also increased on Puerto Rico general obligations, although not as much as the Cofinas. Commonwealth general obligations with an 8 percent coupon and maturing in 2035, the island s most activelytraded security, changed hands Wednesday at an average price of 41.7 cents on the dollar, similar to where the bonds were pricing last week. The commonwealth agent and the Cofina agent will spend the next 60 days working with opposing groups of bondholders on the details needed to implement the deal. The exact nature of the compromise, and how it may split up sales taxes between Cofina bondholders and the commonwealth s government, has yet to be made public. During the 60-day waiting period, the federal oversight board will begin incorporating the deal into the debt-adjustment plan it s preparing, board lawyer Brian Rosen told Swain during the hearing. That plan will tell bondholders, government retirees and other creditors how much they can expect to FOR INTERNAL USE ONLY Page 5 of 7

6 recover. The debt-adjustment plan, which must be approved by Swain, will be based on the fiscal recovery plan the board certified on May 31. Economic Data/Comments: Yesterday: o Productivity/Unit Labor costs: 1st-Quarter Productivity Rose 0.4%; Est. 0.6%. Unit labor costs rose 2.9% in 1Q; up 2.7% preliminary. Real compensation fell 0.2% in 1Q; down 0.1% preliminary Today: Jobless claims, consumer credit Elsewhere: The ECB wants to teach investors a lesson two lessons in fact. That s the message emerging quietly, but insistently from Frankfurt this week. Whether investors are willing to listen is another matter. If the long march toward more normal monetary policy in the euro zone is to go smoothly, ECB policy makers need investors to stop viewing bond purchases as the bank s main tool for dealing with short-term bumps in the economy. That s lesson one and it could be delivered as early as next week s monetary policy meeting, if that ends with a firm timetable for ending bond purchases. Lesson two is to please, please, stop tying ECB bond purchases to every political twist and turn in Italy. So far, neither of these efforts at re-education have been well received. o ECB Chief Economist Peter Praet yesterday signaled the bank s first formal round of talks on when to stop buying bonds is imminent. That would start the process of bringing down the curtain on stimulus efforts that have resulted in almost 2.5 trillion euros of bond purchases since "It s clear that next week the Governing Council will have to make this assessment," Praet said in Berlin. Eurostat reports Eurozone GDP rose 2.5% y/y vs flash +2.5% y/y. Germany April Factory Orders Fall 2.5% M/m; Est. +0.8% M/m FOR INTERNAL USE ONLY Page 6 of 7

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