IHS Markit: Bears in the bond market
31 July 2018 New York
Image: Shutterstock
The cost of insuring Tesla debt against default is rising, according to Samuel Pierson director of finance at IHS Markit.
Although recently offered credit default swap (CDS) contracts reflect credit concerns, Pierson stated that the market shows limited borrow availability for the 5.3 percent 2025 bond.
However, he noted that Tesla is still the most shorted US equity, currently $10.5 billion.
He said: “A storm of negative headlines has recently surrounded electric automaker Tesla. While the firm’s operations have been called into question, there has also been increasing scrutiny of the firm’s outspoken CEO Elon Musk and his use of Twitter.”
“Critics of the firm have also been outspoken, often using Twitter as a platform as well. Some of those critics are also betting against the firm, making Tesla the most shorted US equity and pushing the short position in its bonds above $334 million. Additionally, there has recently been a market made for credit default swaps referencing the firm’s debt obligations.”
IHS Markit found that there has been increased interest in trading CDS on Tesla since late June, at which point the five-year CDS was offered around 18 points upfront.
The upfront points on the offer widened during the second week of July, peaking above 23 points on 12 July following reports that former employee Martin Tripp had filed a whistleblower complaint with the US Securities and Exchange Commission.
Credit shorts were active in the 5.3 percent 2025 bond from the initial issuance in August last year, borrowing 8 percent of the total issue size within the first week following the offering, or $140 million at par.
The short position in the 2025 bonds, implied by borrowing demand, has increased to $264 million at present, or 14 percent of the issue size.
Pierson said: “While that suggests there’s another 86 percent of the issue to go, that isn’t really the case, as owners of the bonds have only put 14 percent of the issue into lending programmes where they can be readily borrowed by short sellers or market makers.”
He added: “The utilisation of that lendable supply has not been lower than 95 percent in 2018, despite the size of the pool increasing by $40 million.”
The equity shorts reduced their position size by eight million shares in the first three weeks of June, while the share price increased by more than 20 percent.
Of this Pierson said: “In early July, along with the share price, short positions increased by five million shares and have remained relatively steady at 35 million shares since. This past week saw a 350,000 share increase, putting the total at 35.4 million shares.”
He added: “Given that many short sellers have stated that their position is expressed through long-dated put options, it’s fair to assume that some portion of the daily gyrations in short interest are the result of option market makers adjusting their hedges in response to price changes.”
Although recently offered credit default swap (CDS) contracts reflect credit concerns, Pierson stated that the market shows limited borrow availability for the 5.3 percent 2025 bond.
However, he noted that Tesla is still the most shorted US equity, currently $10.5 billion.
He said: “A storm of negative headlines has recently surrounded electric automaker Tesla. While the firm’s operations have been called into question, there has also been increasing scrutiny of the firm’s outspoken CEO Elon Musk and his use of Twitter.”
“Critics of the firm have also been outspoken, often using Twitter as a platform as well. Some of those critics are also betting against the firm, making Tesla the most shorted US equity and pushing the short position in its bonds above $334 million. Additionally, there has recently been a market made for credit default swaps referencing the firm’s debt obligations.”
IHS Markit found that there has been increased interest in trading CDS on Tesla since late June, at which point the five-year CDS was offered around 18 points upfront.
The upfront points on the offer widened during the second week of July, peaking above 23 points on 12 July following reports that former employee Martin Tripp had filed a whistleblower complaint with the US Securities and Exchange Commission.
Credit shorts were active in the 5.3 percent 2025 bond from the initial issuance in August last year, borrowing 8 percent of the total issue size within the first week following the offering, or $140 million at par.
The short position in the 2025 bonds, implied by borrowing demand, has increased to $264 million at present, or 14 percent of the issue size.
Pierson said: “While that suggests there’s another 86 percent of the issue to go, that isn’t really the case, as owners of the bonds have only put 14 percent of the issue into lending programmes where they can be readily borrowed by short sellers or market makers.”
He added: “The utilisation of that lendable supply has not been lower than 95 percent in 2018, despite the size of the pool increasing by $40 million.”
The equity shorts reduced their position size by eight million shares in the first three weeks of June, while the share price increased by more than 20 percent.
Of this Pierson said: “In early July, along with the share price, short positions increased by five million shares and have remained relatively steady at 35 million shares since. This past week saw a 350,000 share increase, putting the total at 35.4 million shares.”
He added: “Given that many short sellers have stated that their position is expressed through long-dated put options, it’s fair to assume that some portion of the daily gyrations in short interest are the result of option market makers adjusting their hedges in response to price changes.”
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