to a financial crisis, it does have real-world effects. The cost of borrowing for .... GPs 5yr & Under Summary March
The BondBeat Tuesday, March 27, 2018
See GP disclaimer HERE
What’s On OUR Minds GOOD NEWS POSITIONS LOIS (yeah, again) 5yr auction Bear mkt in bonds just gettin started… Gonna be short and to the point today. Will try to be as clear and concise as I can using some visuals to help this all move right along. FIRST I’d like to note good news as just that, to prove as a bond guy, there’s a constant battle as to whether or not we see the glass as half full or half empty. Chicago Fed National Activity Index -- and specifically the 3moMA of the indicator -- well, it was UP yesterday morning.
Good news is just that. We noted some over the weekend too … in the form of TRADE VOLUMES. Whether or not one should crack the champagne, well, is completely up to you. Next up we’d like to add a bit of color TO the POSITIONS.PDF which we’ve updated to reflect Friday’s CFTC (and recently added more asset class analysis) as we collectively stare down a gut-checking record amount of UST supply this week before month/quarter end. Over the weekend we noted that on a duration weighted basis, speculators had gotten SHORTER and so, when we stumbled upon this visual of DURATION WEIGHTED DEALER positions (Bloombergs Ira Jersey), we thought we’d pass along even THO this BBG ticker only has limited (2013) history: Primary Dealer Positions in U.S. Treasuries Increase in March {NSN P67GS36S9729 } (Bloomberg Intelligence) -- Primary dealers increased their holdings of Treasuries in the week ended March 14 to cover a short in the 2-3 year maturity bucket, and maintained their position in long-maturity Treasuries. Noncommerical risk positions in Treasury futures declined in the week ended March 20. (03/26/18) 1. Dealer Cash Treasury Positioning Dealers increased their Treasury-market exposure off the early February low, as of March 14, returning to December 2017 levels.
Estimated Duration-Weighted Dealer Position
BI uses primary dealer positioning data provided by the Federal Reserve weekly as of the prior Wednesday's close. We calculate dealer risk by using the maturity buckets provided in the data. For raw data see the BI RATES dashboard, under Flow Data and the Dealer Position tab. (03/26/18) Ira goes on to offer a couple // few more that are unlike what WE have for you (this mornings TECHS.pdf, positions, for example) SO here’s another which I’ve slightly modified so as to make it a bit clearer and relevant 2. Primary Dealer Positions in Treasuries On an unweighted basis, dealers' largest position is in long-maturity Treasury securities. Over the last several weeks, positioning primarily rose in the 6-7 year and the 7-11 year maturity buckets. Dealers also covered a small short position in the 2-3 year bucket.
Unweighted Dealer Treasury Positions by Maturity
Primary dealers include Goldman Sachs, Citigroup, JPMorgan, Bank of America and Deutsche Bank. (03/26/18) Again, there are more TO it than DEALERS positions -- unless, of course you take to heart what happened with yesterday’s 2yr auction … The dealer community was IT … the last line of defense. They are the unsung heroes who will have to risk life, limb and balance sheet to help finance Uncle Sam so … where and how they are situated, is helpful to know. Here’s a slightly modified BBG story and visual 03/26/2018 13:20:03[BN]
Wall Street Left With Year’s Biggest Share of 2-Year Sale: Chart
Treasury’s $30 billion two-year U.S. note sale drew a yield of 2.31 percent, the highest since 2008, with a bid-to-cover ratio of 2.91, in line with the average over the past 10 auctions. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 44.5 percent, down from the 49.7 percent average. Direct bidders purchased 14.1 percent. That left primary dealers, which are obligated to bid at auctions, with 41.3 percent, the largest share since December. Hopefully you get the point … and for MORE and how it may all relate TO 5yr auction this afternoon, have at this mornings TECHS.pdf. Now for something completely different. LOIS. Have you heard?? It’s UP. LOTS. But CSFBs Poszar says don’t worry be happy … don’t fret. FINE. YESTERDAY we offered some thoughts from other side of the coin (Mark Grant). WE report, YOU decide?
Fair and balanced? TODAY are a few words from Ira Jersey/BBG this past THURSDAY and to be frank, not sure how to ‘read’ it Libor: The Fake Rate That Matters Oh So Much | {NSN P5ZOGM6TTDSA } Libor's Climb Driven More by Reduced Liquidity Than Credit Risk (Bloomberg Intelligence) -- A casual view of the climb in Libor compared with overnight index swaps (OIS) will miss the crux of the reason for the move. Since the global financial crisis, some have viewed a widening Libor/OIS spread as signaling bank credit concerns, but it's traditionally a sign of declining liquidity, not credit risk. (03/22/18) ...5. Real-Life Costs of Libor's Climb The price of money rising for London-based banks has incrementally tightened financial conditions for many others. Although we don't see the climb in Libor/OIS as a precursor to a financial crisis, it does have real-world effects. The cost of borrowing for many companies and individuals has increased more quickly than policy makers had expected. While unlikely to change the path of the Federal Reserve's hiking cycle yet, further widening in the spread might give policy makers some pause.
Many high yield issuers have loans with rates based on Libor, some but not all of which may be swapped back into fixed rates. Also credit cards, floating-rate mortgages and other consumer credit often reference a Libor rate. (03/22/18) REAL LIFE. Dont fret, Zoltan. NOT YET, anyways …
So, as we’ll be over here wondering about WHAT NEXT and NOT FRETTING, which then is inevitably a more bullish -- BUY DIPS in FI -- point of view, how about we do something completely new and different. END ON A LOW NOTE -- as in a BEARISH ONE. This one is NOT ours but from Prof Anthony Sanders (former DB MBS specialist)
March 26, 2018
The Bear Market In Bonds Is Just Getting Started ($300 Billion Of T-bill and T-notes To Be Auctioned This Week) Which kind of bear is best? The one where the LIBOR-OIS spread doesn’t keep rising! (Bloomberg) — The recent drop in yields will be tested by a surge in borrowing by the U.S. government and a ballooning budget deficit. The bond bears had a good run. The benchmark Bloomberg Barclays U.S. Treasury index declined as much 3.67 percent between early September and late September. Lately, though, they seem to have lost some of their resolve as yields on intermediate-term Treasuries fell back from their highest levels since 2010. If anything, they should be more bearish. The Federal Reserve meeting last week, where the central bank raised interest rates for the fifth time in the last 15 months and signaled two more are on the way by the end of the year, should have breathed new life into the bears. Instead, bonds rallied, in part, as Chairman Jerome Powell downplayed the risks of faster inflation and stocks tumbled. But, a close look at the Fed’s rate forecast reveals that the difference between its call for a total of three increases this year and four amounted to one estimate on the central bank’s “dot plot.” Looking past 2018, the Fed’s outlook is even more bearish for the bond market. The central bank boosted by one the number of rate hikes it expects in each of 2019 and 2020. At the same time, its unemployment rate projections were lowered to an eye-popping 3.6 percent and its inflation estimate rose above its 2 percent target level, to 2.1 percent. Although the shift on inflation was small, it’s important because the Fed finally acknowledged that inflation is likely to overshoot its target, and that former Chair Janet Yellen’s “run hot” approach to policy will continue under Powell. ...It’s true that Treasuries rallied last week, as yield-starved foreign investors poured into the market following the Fed’s rate decision
and equity markets tumbled on the Trump administration’s tariffs targeting Chinese exports. But the most telling part of the action was the 10-year Treasury yields only managed to drop a measly three basis points on the week as the Dow Jones Industrial Average tumbled more than 1,400 points in its worst decline in more than two years. But this week, those lower bond yields will be tested by another round of the debt sales by the government. The Treasury is offering $109 billion of two-, five- and seven-year notes as well as the usual bill offerings. ...The last refunding two weeks ago, which consisted of three, 10- and 30-year securities, surprised many by drawing strong demand. That was before the tariff tantrum in markets. When asked in an interview with Bloomberg Television on Friday whether China plans to scale back its purchases of Treasuries in response to tariffs imposed by the Trump administration, China’s ambassador to the U.S., Cui Tiankai, wouldn’t rule out the possibility. “We are looking at all options,” he said. ...That’s a disturbing thought, given that the Treasury plans to more than double its borrowing this year to some $1 trillion to pay for the expanding budget deficit. ...So, with the Fed on the march toward six quarter percentage-point rate hikes by the end of next year, the federal budget deficit headed to well over $1 trillion, and the government ramping up its borrowing, one has to wonder how long 10year Treasury yields can hover around the 2.80 percent to 2.85 percent level. Please note that the US budget deficit exceeded $1 trillion for 4 years starting in 2009, so it isn’t like we haven’t seen trillion dollar deficits before.
Prof Sanders goes ON to talk/visualize CURVE and LIBOR as well as Fed holdings connecting some dots to create some very intriguing pictures and tying it all together and ending on the following ‘high note’
But can bears beat beets, Battlestar Galactica AND Treasury Secretary Mnuchin?
Best, Saul/Steve Items of Interest
EconoDay Economic Calendar AND, ripped from the BBG:
Bloomy’s Fed-speak Calendar March 27th, 2018
AUCTION CALENDAR FOR THE WEEK AHEAD (March 26th):
GPs Key Econ Indicators March 23rd Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy. GPs 5yr & Under Summary March 23rd this is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent methodology that we use to determine “value”. Please give us a call for more in depth explanation. GPs Index Spread Summary March 23rd We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships.
GPs Daily Pivots March 27th, 2018 -> the pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off.
MMO for March 26, 2018 As expected, the median FOMC forecast for core inflation in 2019 and 2020 moved above the Fed’s 2.0% longer-run objective. This will move the Fed’s internal debate about the long-run policy framework into the spotlight, as the Fed will have to offer an explanation for why it believes that an above-target inflation rate will be appropriate in the coming years. One possibility: the Fed may decide that a 21st century version of “opportunistic disinflation” may be the right way to approach the late stages of a business cycle.
In The Press NOW:
March 27, 2018 5:30 a.m. ET
Arrival of Final Bank Regulator Could Speed Up Easing of Postcrisis Rules Banks can expect to see a surge in relief from postcrisis rules in 2018 after the final Trump-appointed leader is seated at the nation’s banking regulators later this spring. Jelena McWilliams is set to become head of the FDIC as early as April. Updated March 26, 2018 3:41 p.m. ET
How to Lose Money Betting on a Trade War If President Trump is serious about trashing the global trading system, there are few places for investors to hide. Stocks will suffer, the economy will slow down and inflation will pick up. March 25, 2018 9:00 a.m. ET
How $9 Trillion Bond Market Adds Up to Zero for Japanese Traders As the Bank of Japan buys up billions of dollars of government bonds, traders say there is just not much to do March 26, 2018 12:54 p.m. ET
How a Tiny Latvian Bank Became a Haven for the World’s Dirty Money That U.S. officials went after a bank in a fellow NATO country shows the scale of the threat it perceives from this corner of the European Union. ABLV, which flourished under weak European oversight, allowed entities from Russia, Ukraine and North Korea to funnel illicit funds, U.S. officials say.
The Post-World War II Order Is Under Assault From the Powers That Built It
Since the end of World War II, the victorious powers have promoted, trade, democracy and collective security. Now, that order is under assault.
Grocery Wars Turn Small Chains Into Battlefield Casualties
At stake is the fate of thousands of supermarket workers, many of whom belong to labor unions and are owed pensions when they retire.
March 27, 2018
Wall Street’s average bonus in 2017? Three times what most U.S. households made all year. The bigger bonuses reflect a revival on Wall Street as the Trump administration begins rolling back financial industry regulations. Despite sanctions, North Korean economy has stayed relatively stable, experts say
The Trump administration says economic pressure brought Kim Jong Un to negotiation. But evidence of new economic woes in North Korea is scant.
Updated 2:07 p.m. ET March 26, 2018
Store within a store: Can Walmart change how you buy a car?
Bank of England cautions over comeback of risky mortgages
The Bank of England has warned over the level of mortgages being extended with a high loan-to-value or loan-to-income ratio.
Eurozone economic sentiment pulls back in March
Economic sentiment in the euro area pulled back “sharply” in March, stats office Eurostat said on Tuesday, as the quiet drip of more moderate economic data from the region continued.
China's industrial profits pick up, but still fears of slowdown 27 Mar, 2:10am
ICBC beats 2017 profit expectations Nation’s largest bank by assets delivers net profit of US$45.6 billion, a 2.8 per cent gain on 2016 27 Mar 2018 - 6:54am
China industrial profits up 16.1% in Jan-Feb
From The Blog-O-Sphere: Here you’ll find postings and research from the likes of Barry Ritholtz’s Big Picture, Pragmatic Capitalism, Kimble Charting and Zero Hedge - along with everything else we stumbled across that WE need to point out …The point of all this is to pass along things that strike us as interesting – even though they may NOT be our very own…
THURSDAY, MARCH 22, 2018
The Fed is not tightening monetary policy Yesterday the FOMC raised its short-term interest rate target (and the rate it pays on bank reserves) to 1.75%. This move was widely anticipated, and so it matters little. Regardless, monetary policy is nowhere near being "tight," and the Fed's plan to raise rates by another 100 bps or so over the next year is not necessarily a cause for concern. The tightness of monetary policy should always be judged in real terms (i.e., by subtracting inflation from interest rates—higher real yields increase the demand for money and when they get high enough, eventually slow economic activity). Yesterday's rate hike has already been offset by a recent rise in inflation (the PCE Core deflator rose 1.52% in the 12 months ended January, and my estimate has it rising 1.8% in the year ending this month). As result, in the past year, real interest rates have only risen modestly, in synch with a modest pickup in real growth, much as theory would predict. In short, the Fed is following the market's lead, and adjusting real rates higher in line with somewhat healthier growth. This not only makes sense, it's a welcome step in the right direction. However, while monetary policy isn't currently threatening, trade wars are indeed a cause for concern. Trump is engaged in brinkmanship with China, in an attempt to force China to respect intellectual property rights and reduce punitive tariffs on some US exports to China. Today, some Chinese officials threatened retaliatory tariffs on US exports, particularly grains, and that raised the stakes, which in turn explains why the market fell meaningfully. Nobody benefits from tariff wars, particularly a tariff-imposing country's own consumers. If a tariff war were to escalate—heaven forbid—the results could be devastating, as happened with the Smoot-Hawley tariffs and the Great Depression. But everyone could benefit from freer and fairer trade, and I think that's what Trump is aiming for. If we've learned anything about Trump in the past year or so, it's that he is a clever negotiator who scares people from time to time. He undoubtedly believes that you've got to take great risks to achieve great results. While we nervously await the outcome of the Trump vs. China war of nerves, it's helpful to
remember that the growth fundamentals of the US economy are "beautiful," to borrow a phrase. Corporate tax cuts have set the stage for a significant pickup in investment, jobs growth, and real incomes, but it will take awhile before we see the results. The outlook is promising, but we're sweating through a lot of uncertainties at the moment. I think it pays to remain optimistic, but it's clear that uncertainty and risk are a bigger factor today than they have been in more than a year. Here are some charts which are relevant to my comments above: Chart #1
Chart #1 is number one on my Recession Watch list. It shows that recessions have always been preceded by a severe tightening of monetary policy. That tightening in turn consists of 1) real short-term interest rates of 3% or more, plus 2) a flat or inverted Treasury yield curve. Currently, real rates are still unusually low, and while the yield curve has become a lot less steep in recent years, its current slope is consistent with continued growth. The curve is positively sloped because the market believes the Fed will indeed raise rates in coming years, though not excessively…
Wednesday, March 21, 2018
Animal Spirits Remain Spirited
It has been almost a year and a half since the election victory of President Donald Trump on November 8, 2016. The surprising upset seemed to awaken the economy’s animal spirits. They remain aroused. The soft data, based mostly on surveys, remain strong. On the other hand, the hard data, based on business cycle indicators, remain mixed. However, the hard data that matter most to the stock market, i.e., earnings, remain bullish. The hard data that are the most important to the Fed and the bond market are dotted with soft patches, which augur for a continuation of the Fed’s gradual normalization of interest rates. Without any further ado, let’s have a closer at the hard soft data: (1) CEOs’ optimism is flying.
(2) Small business owners are euphoric. (3) Purchasing managers reporting robust growth. (4) Consumer sentiment is upbeat. (5) Boom-Bust Barometer is hot. Often in the past, I’ve stir-fried the WCCI with my Boom-Bust Barometer (BBB) to derive my Weekly Leading Index (WLI). I derive my BBB as the ratio of the CRB raw industrials spot price index and initial unemployment claims. It rose to a record high in
late February. So did my WLI, which has been very highly correlated with the S&P 500 since 2000.
