Daily Market Color June 12, 2019Weak Inflation Sends Rates Tumbling Lower Once More Crude oil falls to nearly $50/barrel on both supply and demand concerns. US crude, and in turn energy stocks both got hit by a surprise buildup in inventories, adding to fears that a worldwide economic slowdown could shrink demand for oil. While most market experts agree that the sell-off appears to be overdone, there appears to be no slowing down US crude production. Energy stocks have fallen nearly 21% in the past year alongside the decline in crude, with names like Exxon Mobil falling 10%+. Ultimately, US crude ended the day at $51.14/barrel. Treasurys continue to rally as US inflation undershoots expectations. May’s Consumer Price Index data came in weaker than expected, headline CPI rising only 1.8% on an annualized basis against the 1.9% forecasted level. With unemployment at all-time lows, inflation will be continue to dictate the Fed’s near-term interest rate path, and today’s figures do little to deter markets that currently price in 2+ rate cuts in 2019. Treasury yields and swap rates fell 3-5 basis points across the curve, the 10 year Treasury yield dropping to 2.12%, not far off the low of 2.07% it established a week ago. ISDA is Urging Accounting Boards to address shifting from interbank offered rates to risk-free rates. In an attempt to avoid delays by market participants in switching to RFRs (i.e. from LIBOR to SOFR), Scott O’Malia, Chief Executive of ISDA, yesterday noted accounting concerns surrounding the transition efforts. In his comments, which seem to be more directed at the IASB than the FASB, O’Malia urged the IASB to prioritize, and to start working on, the transition issues. The good news is that in October 2018 the FASB identified SOFR as a Benchmark Interest Rate, making it eligible for hedge accounting designation. However, they only applied it to newly designated hedging relationships, and added a project to their agenda to consider relief provisions for existing hedging relationships. As a change in the reference rate (LIBOR to SOFR) could cause a loss of hedge accounting and result in income statement volatility, market participants would like to know if they will be able to amend their hedge accounting documentation (from LIBOR to SOFR) without having to end their existing hedge relationships (i.e. without de-designating the LIBOR hedge and re-designating the SOFR hedge). The FASB knows ISDA and others are working on improving fallback provisions for LIBOR-based contracts. However, as the FASB would like to benefit from understanding the outcome of such efforts, they have provided informal indications that switching should not be a termination event, but no definitive position has yet been reached.