Tuesday, October 18, 2022

Here Come The Buybacks

And not just in equities, although as The Market Ear noted on Sunday, those are going to be huge:

Buy back blackout soon gone

The black out ends soon and the buyback during the last two months of the year is big. We should be expecting some $5bn per day VWAP buy orders from corporates, and November is the "aggressive" month. According to Goldman's buyback desk the estimate for Q4 is around $270bn of repurchases....

Large x Large and the practice ought to be illegal. It was, until 1982.

As things currently stand, under SEC rule 10b-18 stock buybacks are just a straight-up tax dodge with the added attraction of boosting shares-based management compensation. If interested see "The Real Reason Stock Buybacks Are a Problem"*

No, the new buyback game is:

Momentum Builds for Creating a Treasury Bond Buyback Program

From Bloomberg via Yahoo Finance, October 17:

The long-simmering idea that the US government should stand ready to buy back Treasury securities from investors to improve market functioning is moving closer to reality.

While the Treasury Department has carried out buybacks in the past -- most recently between 2000 and 2002 -- and while its industry advisers since then have urged it to consider establishing a program, steps taken in that direction last week were more than experts anticipated.

Liquidity metrics for the US government debt market are approaching crisis levels after a year of steep losses for bonds caused by rising inflation and Federal Reserve interest-rate increases, and with the central bank simultaneously cutting some of its holdings, the situation may worsen. Treasury Secretary Janet Yellen expressed concern about it last week.

“When we warned last week that Treasury buybacks might begin to enter the debt management conversation, we didn’t expect them to jump so abruptly into the limelight,” Wrightson ICAP economist Lou Crandall wrote in a note to clients. “September’s liquidity strains may have sharpened the Treasury’s interest in buybacks, but this is not just a knee-jerk response to recent market developments.”

The specific step taken by the Treasury was in its quarterly survey of primary dealers, released Friday in connection with the financing plan to be announced Nov. 2. The 25 dealers were asked for a detailed assessment of the merits and limitations of a buyback program for government securities. When the last financing plan was released in August, the department’s industry advisers on the Treasury Borrowing Advisory Committee recommended further analysis of the issue.

Extreme Volatility
Taken together with Yellen’s recent comments and extreme volatility in the UK bond market in recent weeks, the query suggests “that the November refunding will likely show more progress toward opening a buyback facility,” JPMorgan Chase & Co. rates strategists said in an Oct. 14 research note. Strategists at Bank of America Corp. predicted a rollout in May 2023.

The buybacks in 2000 to 2002 were done to allow the Treasury to continue to sell new bonds to maintain its market access at a time when the federal government was running a budget surplus and didn’t need the money. Funds raised by selling new bonds were used to repurchase old ones.

Under current circumstances, which include large federal deficits, a buyback program would have different purposes. They include adding liquidity to parts of the market most in need of it, and allowing Treasury bills to be sold in more consistent quantities, with proceeds used for buybacks of securities less in demand.

Improving Performance
The segment of the market seen to have the most to gain from a buyback program rallied Friday after the survey was released. Twenty-year bonds, reintroduced in May 2020 in quantities that swamped demand, outperformed neighboring sectors. Crandall said that’s misguided, and that debt managers with “a limited amount of cash to devote to improving the performance of the overall market” are “not going to pour a disproportionate amount into salvaging the 20-year sector.”

Treasury liquidity metrics last month reached the worst levels since the market mayhem at the onset of the pandemic. The Bloomberg US Government Securities Liquidity Index -- a gauge of deviations in yields from a fair value model -- remains near the highest levels since March 2020, when a flight to cash prompted the Fed to begin buying securities to stabilize the market.

“You can drive a truck through the bid-ask spread” for some securities, Deborah Cunningham, chief investment officer of global liquidity markets and senior portfolio manager at Federated Hermes, said in a Bloomberg Television interview Oct. 3....

....MUCH MORE

Perhaps, just perhaps the market is sending a price signal?

Such that, again, perhaps, no one wants to make markets in and/or buy that shit at the price it is being offered and that the signal being sent as to the real, after-inflation rate required to clear the market is much higher than the quoted prices/rates? 

Just perhaps?

And besides, you already have the Fed very willing and very able to shove liquidity down the throats of the banks and on to the the dealers.

And for equity buybacks, the answer is pretty straightforward, go back to the pre-1982 rules on share repurchases:

...II. Overview of Current Rule 10b-18
A. Rule 10b-18 as a "Safe Harbor"
In 1982, the Commission adopted Rule 10b-18,4 which provides that an issuer will not be deemed to have violated Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act, solely by reason of the manner, timing, price, or volume of its repurchases, if the issuer repurchases its common stock in the market in accordance with the safe harbor conditions.5 Rule 10b-18's safe harbor conditions are designed to minimize the market impact of the issuer's repurchases, thereby allowing the market to establish a security's price based on independent market forces without undue influence by the issuer....

The old rule considered it stock manipulation.