All Clear Sounded as Markets Shrug Off Multiple Black Swans

Global markets are signaling that sustained economic growth will more than make up for Japan’s worst disaster since World War II, rising commodity prices and uprisings throughout the Middle East and North Africa.
Interest-rate derivatives, bond sales by the riskiest borrowers and rebounding benchmark stock indexes all show increasing confidence in the economy. New York-based JPMorgan Chase & Co. is putting up $20 billion of its own money in a short-term loan to finance AT&T Inc. (T)’s $39 billion bid for Deutsche Telecom AG’s T-Mobile business.
Manufacturing strength from the U.S. to Germany and China is giving economists more confidence that the recovery from the worst financial crisis since the Great Depression will continue. Goldman Sachs Group Inc. forecasts a global expansion of 4.8 percent this year, while JPMorgan calls for 4.4 percent. The average over the past two decades is 3.4 percent.
“People are trying to balance the global growth with these exogenous economic shocks,” said Charles Burge, the Louisville, Kentucky-based head of investment-grade money management at Invesco Ltd., which oversees $641 billion. “People are thinking growth is the one that’s ultimately going to win and we can move past these one-off incidents.”

‘Black Swans’

Markets have consistently rallied amid those shocks, called black swan events by Nassim Nicholas Taleb, the New York University professor and principal at Universa Investments LP. Taleb’s 2007 bestselling book, “The Black Swan,” showed history is full of events that can’t be predicted by trends. The term refers to the belief that only white swans existed -- until black ones were discovered in Australia in 1697.
This year markets have contended with the ouster of Egyptian President Hosni Mubarak, battles between forces loyal to Libyan leader Muammar Qaddafi and rebels, protests in Saudi Arabia, Bahrain and Yemen, oil above $100 a barrel, record-high food costs and a magnitude 9.0 earthquake in Japan that killed more than 8,000 people and crippled a nuclear power plant.
The events haven’t dented manufacturing that’s expanding worldwide. The Institute for Supply Management’s U.S. factory index for the U.S. rose to 61.4 in February, the highest level since May 2004. China said in January that industrial production rose 13.5 percent in 2010, while growth in Europe’s service and manufacturing industries accelerated to the fastest pace in more than four years last month, led by Germany.

Swap Spreads

The difference between the two-year U.S. swap rate and the comparable-maturity Treasury note yield, used to gauge investor perceptions of credit risk, fell to 20.3 basis points yesterday from this year’s high of 26.13 on Jan. 7. That contrasts with last year, when swap spreads surged to 64.21 on May 25 from 9.6 two months earlier as concern mounted that budget turmoil in Greece would infect Europe’s banking system.
Some of the riskiest borrowers are tapping the bond markets for cash with relative ease.
The Philippines, rated Ba3 by Moody’s Investors Service, sold $1.5 billion of dollar-denominated bonds yesterday, completing its target for global financing and helping to cover this year’s budget deficit. Intelsat SA, the commercial satellite operator taken private in 2005, announced plans yesterday to sell $2.65 billion of debentures in the second- biggest offering of speculative-grade debt this year.
New high-yield, high-risk bonds are reviving after issuance of all types fell more than 50 percent last week amid the threat of a nuclear disaster in Japan and growing tensions in the Middle East. Relative yields on the securities ended yesterday at 498 basis points, down from 522 on March 16, the most since Jan. 14, according to Bank of America Merrill Lynch index data.

‘Happier and Healthier’

“The market has stabilized,” said Marc Gross, a money manager in New York at RS Investments, which oversees $3 billion in fixed-income funds. “I am not sure if risk is all the way back on to where it was, but the market seems much happier and healthier after a short-term panic attack last week.”
Corporate bonds of all ratings dropped last week as Bank of America Corp. (BAC) led $41.2 billion in sales, a 58.4 percent decline from $98.9 billion in the five days ended March 11, according to data compiled by Bloomberg.
Mutual funds that invest in junk bonds, or those rated below Baa3 by Moody’s or lower than BBB- at Standard & Poor’s, had $471 million of outflows last week, the first time investors pulled cash from them this year, Deutsche Bank said in a report.
Borrowers stepped back as volatility jumped. The Chicago Board Options Exchange Volatility Index, derived from the price of S&P 500 options, soared 39 percent on March 15 and 16 to 29.4 for the biggest two-day gain since May, when the volatility index reached its 2010 peak of 45.79. The index fell to 20.6 yesterday.

‘Coming Back’

“We had a little bit of volatility, but we’re coming back,” Invesco’s Burge said.
The MSCI World (MXWO) Index of stocks climbed in each of the past three trading days, jumping 3.8 percent to 1,307.42. The S&P 500 Index rose 3.3 percent and the Stoxx Europe 600 Index advanced 3.9 percent to 272.33.
“The U.S. economy looks like it’s on solid footing and earnings will continue to grow,” said Joseph Keating, the Birmingham, Alabama-based chief investment officer at CenterState Wealth Management, who oversees $1 billion. “This is a buying opportunity. Time to get in the market.”
While investors pulled cash out of junk bond funds last week, they poured money into those that buy high-yield bank loans, according to Deutsche Bank reports citing Lipper FMI.

Treasury, Fed

The U.S. Treasury Department displayed more confidence yesterday, saying it plans to wind down its $142 billion portfolio of agency-guaranteed mortgage-backed securities by selling as much as $10 billion per month. It began buying the securities after seizing Fannie Mae and Freddie Mac at the height of the financial crisis in September 2008.
The Federal Reserve is continuing to pump cash into the U.S. financial system by purchasing $600 billion of Treasuries through June to spur jobs and avoid deflation in a strategy called quantitative easing. Policy makers led by Chairman Ben S. Bernanke have held the target rate for overnight loans between banks in a record low range of zero to 0.25 percent since December 2008 to fuel growth.
The Fed’s stimulus has helped support the economy and buttressed markets, said John Lonski, the chief economist at Moody’s Capital Markets Group in New York.
“There’s more confidence that at least the U.S. central bank will not be shy about avoiding any close encounter with a double dip,” Lonski said, referring to the odds that America’s economy will slip back into recession.

‘Good News’

AT&T’s agreement to buy T-Mobile USA from Deutsche Telekom AG for $39 billion in cash and stock to create America’s largest mobile-phone company is another sign of confidence in economic stability, said Matt Toms, the Atlanta-based head of U.S. public fixed income investments at ING Investment Management, which oversees more than $500 billion.
“That’s a big deal and means there’s some confidence in corporate managements that there’s enough stability to get it done.” Toms said in a telephone interview. “You’re seeing corporate investments such as that and that’s good news.”
ING is overweight high-yield corporate bonds, Toms said, meaning the firm owns a greater percentage of the debt than is contained in benchmark indexes.
The deal is the largest for AT&T since the acquisition of BellSouth Corp. in 2006 for about $83 billion, Bloomberg data show. It’s the biggest takeover to be announced in the wireless industry worldwide since 2004, when Sprint agreed to merge with Nextel Communications Inc.
“We have a growth economy that seems like it is moving faster than it was six months ago,” said Jason Pride, director of investment strategy at Philadelphia-based Glenmede, which oversees $19 billion in assets. “Everything’s pointing in the direction of an economic expansion. There’s still a lot of work to be done, but it’s moving the right way.”