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Axios Markets

1 big thing: How Fed policy can narrow racial divides

2. Catch up quick

3. Inflation’s poster child

4. So much for global mega banks

5. Charted: Hedge funds still can’t match the S&P 500  

💰 Good morning, Markets friends! Today's newsletter is 1,065 words, 4 minutes.

🚨 It’s Lael Brainard’s turn to head to the Senate today, where she’ll make her case to be confirmed as vice chair of the Federal Reserve. The hearing kicks off at 10am ET, and some Senate Republicans are open to voting yes, Axios’ Hans Nichols and Neil Irwin report. 

1 big thing: Gap grows between rich, poor countries

An illustration of the world as a cracked piggy bank.

3. Powell's next four years

Federal Reserve Chair Jerome Powell. Photo: Graeme Jennings-Pool/Getty Images

4. One piece of the worker shortage

5. Exclusive: King Center, Goldman's One Million Black Women partner

https://images.axios.com/veMWeVOjfFMWe4Ha31Ka8oRN-bA=/0x435:3264x2271/1920x1080/2022/01/11/1641944830414.jpg

👋 Good morning! Today’s newsletter is 1,206 words, 5 minutes.

👀 All eyes will be on the latest inflation numbers when they’re released this morning. 

Economists expect that as of December, the Consumer Price Index will show an increase of 7% over the course of the year. 

1 big thing: Putin's (natural) gaslighting of Europe

Photo illustration of Vladimir Putin surrounded by yellow stars and pipelines.

Bonus chart: Europe's natural gas problem

3. Meme stock test

Outside view of the closed AMC Theater, amid the coronavirus pandemic

4. More Fed trading fallout

Outgoing Fed vice-chair Richard Clarida at his 2018 confirmation hearing. Andrew Harrer/Bloomberg via Getty Images

5. Not-so-private capital

☀️ Good morning, Markets people! Today’s newsletter is 1,228 words, 5 minutes. 

🚨 This morning, Fed chair Jerome Powell heads to his confirmation hearing before the Senate Banking Committee. 

In his opening statement, he’ll pledge to use the Fed’s tools to prevent higher inflation from becoming entrenched. See his full statement here. 

1 big thing: The labor shortage is bigger than the pandemic

Bonus chart: Missing in action

3. Rising mortgage rates could slow house price surge

4. Corporate America's incredibly profitable pandemic

5. Court nixes workplace vax mandate

🥳 Happy Friday! We Markets newsletter writers will be off on Monday observing Martin Luther King Jr. Day — we'll be back in your inbox Tuesday.

🚨Breaking late last night: President Biden's nominees for the Federal Reserve's board of governors. Read more about Sarah Bloom Raskin, Lisa Cook and Philip Jefferson — and what their nominations mean for the future of the Fed. 

⏱ Today's newsletter is 1,189 words, 4.5 minutes. 

National

Data: Bloomberg U.S. Aggregate Index; Chart: Axios Visuals

Last year’s sell-off in the investment-grade corporate bond market — where the most creditworthy U.S. companies borrow money — was one of the worst in history. This year: There aren't enough bonds to go around.

The big picture: A possible end to the current rate hike cycle — and the downward pressure those hikes put on bond prices — is coming into sight. 

That means that “all the pain that was caused last year by the Fed hiking is about to stop,” Matt Brill, Invesco's U.S. head of investment grade credit, tells Axios.

The pending Fed pause, plus the higher absolute yields that IG bonds now offer — more than 5% on average — are luring investors back into credit. 

“We’re seeing inflows pick up, versus outflows last year. And all of a sudden, there's not enough bonds to go around, which is kind of crazy,” Brill says.

Between the lines: So far this year, a quirk in collective bond issuance is igniting even stronger bids in the secondary market, where $10 trillion worth of IG bonds trade.

What's happening: Corporate execs seem to think that rates will come back down soon-ish — so they're shying away from issuing longer-term bonds that lock in current market levels.

The evidence: The share of bonds issued this month with maturities in just five years is much higher than usual, while the share of bonds maturing in 20 or more years is significantly lower, data from PitchBook LCD shows.

The impact: Investors tend to like longer-term paper because there's less reinvestment risk. As a result, the relative scarcity of 20+ year bonds in the new issue market has lit up demand for long-dated bonds trading in the secondary market at depressed dollar prices, Brill says. 

These bonds, issued by giants like Apple or Morgan Stanley at rock-bottom rates in 2020-2021, sank to prices in the 60 to 70 cents on the dollar area last year. But in recent months, many have gained 10 to 15 points from their lows. 

Where it stands: IG bonds are having their best start to the year in at least a decade (check out the chart above). 

What to watch: One thing that could stop the rally in its tracks? A hard landing for the economy. 

New year, new bond market

Bonds

<div><figure><div id="av-hermesv2/2023-01-25-2152-us-investment-grade-UXWQG" style="max-width:100%"><img alt="Data: Bloomberg U.S. Aggregate Index; Chart: Axios Visuals" class="axios-visual-newsletter-fallback-image" src="https://graphics.axios.com/hermesv2/2023-01-25-2152-us-investment-grade/fallbacks/2023-01-25-2152-us-investment-grade-fallback.png" width="1204" height="842"/><img alt="Data: Bloomberg U.S. Aggregate Index; Chart: Axios Visuals" class="axios-visual-apple-fallback-image" src="https://graphics.axios.com/hermesv2/2023-01-25-2152-us-investment-grade/fallbacks/2023-01-25-2152-us-investment-grade-apple.png" width="1131" height="1332"/></div><figcaption>Data: Bloomberg U.S. Aggregate Index; Chart: Axios Visuals</figcaption></figure></div>Last year’s <a class="gtmContentClick" data-vars-link-text="sell-off in the investment-grade" data-vars-click-url="https://www.axios.com/2022/07/18/investment-grade-corporate-bonds-suffer" data-vars-content-id="36072e6d-8cf3-4e27-a67b-dde0e80e322e" data-vars-headline="New year, new bond market" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/07/18/investment-grade-corporate-bonds-suffer" target="_self">sell-off in the investment-grade</a> corporate bond market — where the most creditworthy U.S. companies borrow money — was one of the worst in history. This year: There aren&#x27;t enough bonds to go around.The big picture: A possible end to the current rate hike cycle — and the downward pressure those hikes put on bond prices — is <a class="gtmContentClick" data-vars-link-text="coming into sight" data-vars-click-url="https://www.reuters.com/markets/rates-bonds/fed-deliver-two-25-basis-point-hikes-q1-followed-by-long-pause-2023-01-20/" data-vars-content-id="36072e6d-8cf3-4e27-a67b-dde0e80e322e" data-vars-headline="New year, new bond market" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.reuters.com/markets/rates-bonds/fed-deliver-two-25-basis-point-hikes-q1-followed-by-long-pause-2023-01-20/" target="_blank">coming into sight</a>.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

A turbulent market has highlighted just how difficult it is to provide retail investors access to illiquid investments like real estate and other private assets.

Why it matters: Raising funds from the “mass affluent” has become the next big growth area for private equity (PE) firms that historically tapped institutions and the uber-wealthy.

Driving the news: In recent months, a spate of redemption requests by investors in the Blackstone Real Estate Income Trust (BREIT) is proving to be something of a test for the relatively new “semi-liquid” fund structure created for individual investors.

Notably, it's a legacy-PE-style institutional investment announced this week that may help shore up confidence — and liquidity — in BREIT, the premiere consumer-focused fund. 

The backstory: Semi-liquid funds are a recent innovation, with lower minimum investments and more withdrawal options than traditional private market funds. Firms like Apollo and Starwood manage these types of vehicles, too (the latter has also faced high redemptions in a real estate fund).

Since BREIT's assets — like residential real estate and warehouses — can’t be bought and sold on demand to meet daily redemption requests, the fund caps withdrawals at 2% of net asset value per month, and 5% per quarter. 

In terms of the ability to pull your money out, these funds sit between traditional private market funds that require (usually) very large and rich investors to lock up their money for years at a time, and the daily liquidity of stocks and mutual funds. 

The intrigue: Over the last several months, BREIT redemption requests exceeded the fund's withdrawal limits, so some investors in need of cash couldn't take all their money out. 

Just 43% of requests were approved in November; the fund was up about 9% year-to-date at the time, the FT reported.  

The $68 billion fund was sitting on $9 billion of cash as of December — more than enough to handle a quarterly withdrawal of 5% for at least a couple of quarters, though perhaps not indefinitely.

The fund can raise cash by selling assets — as it did in November — but that process takes time. 

The latest: The University of California's endowment is investing an eye-popping $4 billion dollars in BREIT.

The cash injection is most notable for how it reaches back to the classic PE playbook: the massive size, institutional origin — and a six-year lock-up period.

But, but, but: Unlike traditional PE, the endowment will receive a minimum 11.25% annual return, with any shortfall (up to $1 billion) backstopped by Blackstone itself — quite an incentive.

Zoom out: When BREIT investor redemptions exceeded the cap, the fund’s structure worked exactly as it was supposed to — and as investors knew (or at least, should have known) that it would. There are pros and cons to this, of course. 

Cons: Investors who wanted or needed their money couldn’t get their hands on all of it immediately.

Pros: This is the whole point of private market funds. The lack of immediate and total liquidity prevents a doom loop of selling that sinks asset prices.  

What to watch: How much more demand for withdrawals BREIT faces in the coming quarters — and whether the fund will want to scare up more institutional support. That will be eye-opening for an industry that’s plowed resources into new products designed to reach the masses.  

Blackstone trust becomes a test of the retail investing trend

A turbulent market has highlighted just how difficult it is to provide retail investors access to illiquid assets.

Illustration of a pattern of houses made of money

Private equity

A turbulent market has highlighted just how difficult it is to provide retail investors access to illiquid investments like real estate and other private assets.Why it matters: Raising funds from the “<a class="gtmContentClick" data-vars-link-text="mass affluent" data-vars-click-url="https://en.wikipedia.org/wiki/Mass_affluent" data-vars-content-id="4584a34e-c55b-4b02-ae16-9b23746d000c" data-vars-headline="Blackstone trust becomes a test of the retail investing trend" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://en.wikipedia.org/wiki/Mass_affluent" target="_blank">mass affluent</a>” has become the <a class="gtmContentClick" data-vars-link-text="next big growth area" data-vars-click-url="https://www.axios.com/2022/08/22/democratization-coming-private-markets" data-vars-content-id="4584a34e-c55b-4b02-ae16-9b23746d000c" data-vars-headline="Blackstone trust becomes a test of the retail investing trend" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/08/22/democratization-coming-private-markets" target="_self">next big growth area</a> for private equity (PE) firms that historically tapped institutions and the uber-wealthy.

Pro Rata

Axios Pro Rata

The University of California agreed to invest $4 billion into Blackstone Real Estate Income Trust, a $68 billion nontraded REIT whose holdings include residential homes and warehouses.

Why it matters: It's a major vote of confidence for BREIT, at a time when Blackstone needs it most. 

BREIT's semi-liquid structure has helped the firm attract a new class of individual investor, but a late-year redemption surge caused Blackstone to pause withdrawals; leading to a double-digit percentage decline in its stock price.

Details: UC will receive a minimum 11.25% annual return, which also serves as a hurdle rate for BREIT's managers. If performance falls short, Blackstone will make up the difference, up to $1 billion. In exchange, UC committed to a six-year lockup.

The bottom line: UC's injection into consumer-focused BREIT is most notable for how it reaches back into the classic private equity playbook. The massive size, the institutional origin and the illiquidity.

The University of California makes a $4 billion bet on Blackstone

It's a major vote of confidence, at a time when Blackstone needs it most.

The Blackstone Group

The University of California agreed to invest $4 billion into Blackstone Real Estate Income Trust, a $68 billion nontraded REIT whose holdings include residential homes and warehouses.Why it matters: It&#x27;s a major vote of confidence for BREIT, at a time when Blackstone needs it most.

One of the big stories of 2022 was the collapse in deal activity. IPOs, M&A, and corporate bond deals all shriveled as rising rates and economic uncertainty clobbered markets. But remarkably, private equity buyouts just wrapped their second-busiest year in more than a decade — check out that chart above. 

The big picture: This is one example of the explosive growth of private markets — for both equity and debt — a trend that was well underway even before the pandemic. 

How it works: PE firms raise money from institutions and wealthy individuals, and in turn, use those funds as down payments to buy companies.   

They typically borrow heavily from investment banks to cover the rest of the purchase price for these deals, known as leveraged buyouts (LBOs) — just like a mortgage on a home. 

By the numbers: PE deal volumes were, of course, down from 2021 — a year that may, in time, turn out to be a colossal Fed-driven anomaly. But last year’s U.S. deal value was still 61% higher than the pre-pandemic average (2013-2019).

What happened: PE funds are sitting on record dry powder that they need to deploy into deals — and public companies got a whole lot cheaper to scoop up during 2022’s bear market.

Plus: Private debt funds stepped in to finance the deals when the corporate bond and bank loan market started to seize up around midyear. 

The private debt market "is definitely what kept LBO volume going in Q3 and Q4,” Susan Kasser, Neuberger Berman’s co-head of private credit, tells Axios. 

As PitchBook wrote last month: “Of the 26 take-privates announced in the US and Europe since early June 2022, not a single one has been funded by banks; they are relying instead on private debt funds or all-equity structures.”

What we’re watching: The environment may be A-OK for acquisitions, but PE returns are all about the exits — and that’s a little tougher, considering falling valuations and the disappearing IPO market.

PitchBook estimates that PE exit activity — when firms sell a company and actually realize a profit (or loss) — last year fell to a low not seen since the financial crisis. 

2022 was a huge year for leveraged buyouts

2022 was the second busiest year in more than a decade — in spite of rising rates.

Chart shows U.S. targeted leverage buyout deal value

One of the big stories of 2022 was the <a class="gtmContentClick" data-vars-link-text="collapse in deal activity" data-vars-click-url="https://www.axios.com/newsletters/axios-markets-6911d12d-c6f0-437e-8ffd-f9aa6ad380a3.html" data-vars-item="in_content_link" href="https://www.axios.com/newsletters/axios-markets-6911d12d-c6f0-437e-8ffd-f9aa6ad380a3.html" target="_self">collapse in deal activity</a>. IPOs, M&amp;A, and corporate bond deals all shriveled as rising rates and economic uncertainty clobbered markets. But remarkably, private equity buyouts just wrapped their second-busiest year in more than a decade — check out that chart above. The big picture: This is one example of the explosive growth of private markets — for both equity and debt — a trend that was well underway even before the pandemic.

Emerging market debt and equities have rallied over the last few months. The main driver? China. 

Why it matters: It’s another example of how the world's second-largest economy sets the pace for the rest of the globe — or at least that’s what investors are banking on. 

China’s reopening from punitive COVID-related lockdowns last year has invigorated growth prospects across the emerging market landscape, and investors don’t want to miss out on potential gains after the dismal returns of 2022. 

What they’re saying: “Things started rallying mainly on the back of China reopening back in November. That plus more benign inflation coming out of the U.S. really changed the whole mindset toward EM,” Reza Karim, investment manager for EM fixed income at Jupiter Asset Management, tells Axios. 

State of play: Inflows to EM stock and bond funds hit record rates in January. 

And since last November, EM equities have gained nearly 21% — after shedding 29% from January to October, as measured by the iShares MSCI Emerging Markets ETF. 

EM sovereign bonds are up 10.6% in the last three months, after a negative 16% return over the prior 10 months, using the JPMorgan Emerging Market Bond Index as a proxy. 

The big picture: Chinese assets make up a huge portion of the EM investing universe. 

In addition to ending the economically constricting COVID-zero policies, the government is also easing crackdowns on key areas like real estate and tech, boosting the value of assets in those areas. 

Meanwhile: Chinese households have socked away hundreds of billions in excess savings that are now getting spent — particularly on tourism outside the country, Karim says.   

Reopening vibes are also lifting commodities prices — and many EM corporates are commodities-tied producers or exporters that stand to gain, he adds. 

What we're watching: How long these gains will last, especially with U.S. recession fears swirling. As Bloomberg reports, the commodities boost is already showing signs of slowing. 

China reopening spurs returns in emerging market funds

The world's second-largest economy sets the pace for the rest of the globe.

Emerging markets

Emerging market debt and equities have rallied over the last few months. The main driver? <a class="gtmContentClick" data-vars-link-text="China" data-vars-click-url="https://www.axios.com/world/china" data-vars-content-id="86e79d7a-6169-46e0-8e4e-7a8435c01c00" data-vars-headline="China reopening spurs returns in emerging market funds" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/world/china" target="_self">China</a>. Why it matters: It’s another example of how the world&#x27;s second-largest economy sets the pace for the rest of the globe — or at least that’s what investors are banking on.

Kate Marino

Stories

China reopening spurs returns in emerging market funds

New year, new bond market

Blackstone trust becomes a test of the retail investing trend

The University of California makes a $4 billion bet on Blackstone

2022 was a huge year for leveraged buyouts

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