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The BondBeat Wednesday, June 28, 2017

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In The News …  CNBC: Slack in the European economy looks worse than we thought, says ECB vice president

 RTRS: China c.bank to hold off on tightening to meet growth target-sources

 BBG: Trio of Fed Speakers Warn on Valuations With Eyes on Tightening

 ZH: WTI/RBOB Tumble After Unexpected Inventory Builds    

BBG: IMF cuts U.S. outlook, calls Trump's growth target unrealistic IMF: US -- …Concluding Statement of the IMF Mission ZH: Chinese Satellite Data Hint At Ominous Manufacturing Slowdown BBG: NYSE President Calls Short Sellers ‘Icky’

 BI: MOST IMPORTANT of IMPORTANT CHARTS Quick (& clickable) Links:

Items Of Interest

What Happened Overnight

GP Documents:

Wed 6/28/2017 5:21 AM

Bloomy/EconODay Calendar

- Econ Indicators - 5yr & Under - Index Spreads -

Daily Pivots (end of TECHs)

POSITIONS UPDATES

Specs covered SOME 10y, Eurodollar shorts BUT GOT SHORTER’er on dur wtd basis

StreetStuffWkly 06.26.17

StreetStuff 06.28.17 Technicals 06.28.17

ADULT SWIM. Price action IS the story, begetting MORE price action AND VOLUMES. Bunds following through on sell off set in to motion by Draghi comments YESTERDAY. USTs this morning ‘catching down’ – taking LEAD as technical stops being triggered. 10y FUTS now below 126-05 and CASH leaking ABOVE 2.23. To say much more would be misplaced. You can click some of the h’lines I’ve linked below and find tangentially interesting. OIL cannot get out of its own way after INVENTORY DATA (API via ZH) LAST NIGHT. IMF CUTS US outlook. Fed out talking VALUATIONS in force. Nothing matters as much as price action at moment … UST prices took the stair case UP and are now taking the elevator back down … FACTS haven’t changed as much as prices and Draghis comments are being characterized and likened TO Bernanke’s 2013 taper tantrum. Time will tell but this morning isn’t about thinking, its about HITTING BIDS first … International Trade (830a), Pending Home Sales (10a), 2yr FRN auction (1130a) and then 7s @ 1pm – get those bids in early and often and as Sgt Phil Esterhaus used to say, ‘Lets be careful out there’…

What’s On OUR Minds FX continues to reverberate NO demand for ULTRAs (one mans opinion) Confused? Here’s THE visual 7yr auction -- some visuals to consider (techs.pdf) Adult Swim! Sign hanging prominently at the front door when you walk in today. This being the case, a lengthy missive about overnight price action OR a deep ‘thought piece’ about future of MACRO or how it MIGHT inform MICRO would be a waste of time. Since mkts still reeling from YEST Draghi comments impact on FX (see DBs latest call FOLD on this mornings STUFF.pdf) we thought it might be appropriate to offer up another couple visuals like we did yesterday … these relationships still matter -- and MAY be changing … jury still OUT on that one …

AND

The message WE take away from BOTH of these is to be BUYERS OF DIPS IN US -- either OUTRIGHT or vs Bunds which are LEADING … the 2nd visual makes clear that trend REMAINS IN PLACE … and while we KNOW the trend is yer friend UNTIL IT BENDS, we can’t help but think Draghi comments poured a bit of gasoline on this one … Turning BRIEFLY to another mans opinion -- from BBG the other day couldn’t let this one slip by without mention. Seeing as one part of the DJT agenda -- specifically from Department of Treasury -- is to ISSUE 50 or 100yr debt to fund the great REBUILD … essentially making America GREAT again … what IF you threw a debt party and nobody came? Treasury's Ultra-Long Bonds Have No Natural Demand The demise of defined benefit pension plans removes the only logical buyers from the market. By Ash Alankar June 26, 2017, 5:00 AM EDT ...The idea of locking in low long-term interest rates is obviously appealing to the

government. However, the internal working group formed by the Treasury to study demand for debt with such maturities may end up reporting back that the idea is a nonstarter. There’s not much point issuing such debt if no one wants to buy it, and the market is limited in the U.S. The natural demand for ultra-long bonds comes from buyers who need to hedge ultralong liabilities, and they generally are defined benefit pension plans. While 96 percent of assets under management were in defined benefit plans in Japan and 82 percent in the U.K. in 2016, the amount of money in such plans, both traditional and hybrid, was only 40 percent in the U.S., with the remainder in defined contribution plans, according to Willis Towers Watson’s Global Pension Assets Study 2017. The decline in defined benefit in favor of defined contribution looks to be systemic and irreversible. Only 5 percent of Fortune 500 companies offered the option of a traditional defined benefit plan to new hires in 2015, with the average size of such plans near the bottom 10th percentile by assets, according to Willis Towers Watson. Further, only 33 percent of defined benefit plans, which includes hybrid and traditional plans, were open in 2015, with 63 percent frozen or closed, further limiting the market for long-duration assets as the liabilities in the closed or frozen plans have likely shortened substantially. ...With defined benefit plans in the U.S. small and shrinking, and likely holding mainly legacy assets because most of them are frozen or closed, the natural pool of ultra-long bond buyers is drying up and is unlikely to be replenished. As a result, such long duration bonds are likely to suffer from limited liquidity. For somewhat MORE on pension (UNDER)funding, have at this mornings STUFF.pdf and note a reprint of WELLS report “U.S. Corporate Pensions Are Stuck in the Mud …We continue to see a pull-back from fixed income and moderate re-risking among corporate pensions. The 2016 company data appear to validate this view.” Confused yet?? So too, are we. Banks FAILING and being PUT to other stronger banks in Italy for a BEAR-to-JPM price over the weekend. Durable Goods swing-and-a-MISS. NOflation. Lack

of wage growth. LOW yields, flattening CURVES and yet, CBs around the world have apparently decided. ITS TIME. And so be it. We’ll all be here to clean up whatever the mess is going to be over on aisle 4 … For NOW, though, WE remain more than a bit confused … Thankfully, Morgan Stanley’s got an index for EVERYTHING -- confusion, included.

Current levels are running ABOVE AVERAGE (72) since 2010 (when index began). Confusion breeds contempt and that will more than likely get in the way of a strong 7yr auction later on today but IF you might like some of OUR thoughts/VISUALS to help think about 7s, head over TO our techs.pdf where you’ll find this (and a few others)

Have a great start to the day. Here to help if we can. Adult Swim. Be careful out there... Best, Saul/Steve

Items of Interest

EconoDay Economic Calendar AND, ripped from the BBG:

Bloomy’s Fed-speak Calendar June 27, 2017

GPs Key Econ Indicators June 7, 2017-> 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 June 15, 2017- > 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 May 31, 2017-> 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 June 28, 2016 -> 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. Well, it’s once again that time for information OVERLOAD and so we remind you … clicking up the StreetStuffWeekly.pdf will bring you to a few paged SUMMARY – a cliff notes version, if you will – of what some of the brightest minds and best SELLSIDE analysts are saying and thinking. WE have focused mostly on things directly impacting US RATES so you’ll find lots of specifics as well as economics AND EVEN a couple of the more notable equity thoughts. Just because. Here are OUR ‘cliff notes’ of what stood out this weekend and what you’ll find on the PDF WE’VE LINKED TO:

StreetStuffWEEKLY June 26, 2017 CATCHING UP AFTER COUPLE DAYS OFF … couple things that stood OUT – MS new / updated BMIs flashing BUY (buy 10s @ 2.15). Citigroup asking IF next move a CUT and in another note, remains BULLISH MUNI CASH. DBs RATES guy (Konstam), “We stick with a tactically bullish view for lower yields reflecting the risks for lower output momentum and inflation into the second half of the year…” GS has a NEW current INFLATION indicator (check out on bbg … esp the ‘innovations’ ticker – rolled over into NEGATIVE territory then read US econ analyst, “The Next Recession: Lessons from History…” Wells – favor 5s10s FLATTENING, continued pension underfunding DEMAND FOR RISK ASSETS (and UNCH annual demand for FI @ 80-120bb)

StreetStuff June 28, 2017 this from Goldilocks: Global Markets Daily: How to Compare Bond and Equity Yields (Himmelberg/Weldon) – SEE VISUAL and read, “earnings yields to bond yields, retains a powerful grip on the “valuation narrative” in the equity market. This “yield gap” (a.k.a the “Fed spread”) is currently at its 74th percentile since 1961, which makes it tempting to conclude that equities offer better-than-average relative value vs long-term bonds. But this metric is flawed… When mapped to expected returns, the yield gap implies a 5-year expected excess return of equity over bonds of 6.8%. Our “premium gap” on the other hand implies a 5-year expected excess return of equity over bonds of just 0.6% vs. an average of 5.9% historically. and then there’s THIS from UBS – thinking AHEAD w/Core PCE inflation preview, “We forecast PCE prices down 0.1%m/m and core prices 0.0%. Risk to the forecast for core prices is skewed towards 0.1%—our estimate is +0.04%, right in between a 0.0% and a 0.1%m/m. However, in either case, the outcome still would be further slowing in the y/y pace to 1.4%, well down from 1.8% as recently as February and the slowest pace since late 2015.” mid-year outlooks. couple examples of ones you’ll hear about and may want to click up for more CONTEXT: CSFB: The Other Side of the Wall of Worry GSs US Equity Views, “Second-half outlook: Upward revisions to our S&P 500 EPS estimates suggest less downside risk to year-end. We raise our year-end 2017 S&P 500 price target to 2400 from 2300, reflecting a 1% decline over the next six months. This return would represent a 27th percentile event since 1975…” AND…Have a look at Wells report on PENSION FUNDS (originally published June 23), “U.S. CORPORATE PENSIONS ARE STUCK IN THE MUD

Technicals June 28, 2017 w/PIVS: 5s vs 1.79; 10s vs 2.18; 30s vs 2.73 Daily Pivots are RESISTANCE What you’ll find and WHY you’ll wanna point/click:  GP: BUNDS BREAKING BADLY – outright AND vs US10s (set up for continued OUTperformance if spread can take out 178bps); 7s ahead of auction – watch SUPP @ 2.06 and then 2.11 and resistance vs 2.03 then 1.96. On RELATIVE basis, 7s OUTPERFORMING as momentum favors continued outperformance  BMO (on 10s): …We have nearby support where 50 and 200-day moving averages appear to be converging (2.23%). Close to that, we also have strong support at the 2.225% level which has proven an intraday yield top and just beyond which lies a downsloping channel top at 2.24%. A break there puts 2.305% into play, though it’s not our base case that we’ll get that far…  CitiFX: Schatz a great looking break? The German 2 year yield is testing strong resistance in this area from -59-(-58)bps where the highs from November, the lows from March of last year and the trend line from the highs converge. A daily close above this area would constitute an upside break and it would open the way for move to -45bps where a couple of good horizontals converge  CSFB : 10s LONG at risk – right AT/below stop/reverse (126-05) … Below 126-05 can see a setback to 125-30/24. AS FAR AS 30s GO, NOW SELLER OF UPTICS (156-25)  GS on 10s and 30s: “View: Still prefer a move down to 1.96%. A break higher than 2.213-2.23% suggests potential to have already based. View: Reached/so far held 2.67%. Confidence in a base increases above 2.807%.”  GS on 10s/BUNDS: The U.S./German 10-year yield spread has finally broken 1.848 support; an ABC equality target from the Dec. ’16 high. The break indicates potential for a more impulsive decline. It’s

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particularly important given that the market has “respected” the level on the first few tests in May. This opens up targets in the area of 1.77 and then 1.63 (1.618 from Dec. ’16).” Kimble: Matter government bond is stronger than S&P 500? …Does it matter that bonds are stronger than stocks? Do bond traders know something that stock traders don’t? … Full Disclosure- Premium Members have been long bonds since around Christmas of last year. SocGen CHART ALERT – 10s, “… T-Note 10: moment of truth at 126-05/00, the trend line support from March low and the confirmation of the Head and Shoulder pattern. T-Note 10 encountered stiff resistance at 126-30 levels consisting of the trend line drawn from 2013 low on continuation chart and the 38.2% retracement of the down trend from June 2016 peak. From there it has started to roll and is currently probing 126-05/126-00, the confluence of the 200 DMA, the steep support line in place since March low and the 23.6% retracement of that up move. It is worth pointing that a break below 12605/126-00 would confirm a Head and Shoulder pattern and could therefore precipitate the down move. Weekly and daily indicators hit a 1-year ceiling and are slowly heading into negative territory, particularly the RSI which is now below the 50% mark. Thus, a break below 126-05/126-00 will deepen the down move with initial objective at 125-14/08, the pattern’s projected target, the graphical levels and the 61.8% retracement of the last bout of down move. 124-23 remains a crucial mid-term support.”

MMO for June 26, 2017 The Alternative Reference Rates Committee took another big step forward last week when it voted to endorse a broad Treasury repo rate as a new secondary benchmark for the market. In contrast to earlier proposed GC indexes, which were restricted to tri-party data, the new broad index will include some bilateral trades cleared through FICC. The new rate won’t officially go into production for some months to come, but the Fed released a couple of years of history of the new rate to give the market a feel for its behavior.

In The Press NOW:

Updated June 28, 2017 4:48 a.m. ET

Eurozone Bonds Extend Selloff on Hints of ECB Taper Investors dumped eurozone government bonds, marking a second day of heavy selling for debt in the region after ECB President Mario Draghi hinted at unwinding the bank’s $2.6 trillion bond-buying program. June 27, 2017 6:54 p.m. ET

Fed’s Kashkari Sees No Strong Case for Raising Rates Given Inflation Levels

Federal Reserve Bank of Minneapolis President Neel Kashkari said Tuesday inflation weakness argues against raising short-term interest rates right now.

Updated June 27, 2017 2:42 p.m. ET

IMF Cuts U.S. Economy Forecast Amid Rising Policy Uncertainty

The International Monetary Fund lowered its forecast for the U.S. economy on Tuesday, saying it could no longer assume the Trump administration will be able to deliver pledged tax cuts and higher infrastructure spending.

June 27, 2017 3:15 p.m. ET

The Bills Stack Up in Illinois, to the Tune of $14.6 Billion Two years without a budget has left a mammoth past-due backlog, with hospitals, dentists and university towns feeling the pain. “Our state is in real crisis,” said Gov. Bruce Rauner. June 28, 2017 5:30 a.m. ET

ETF Buyers Propel Market Rally Booming demand for passive investments is making exchange-traded funds a crucial driver of share prices, helping to extend the eight-year-old U.S. stock rally even as valuations become richer and other big buyers pare back.

Updated June 27, 2017 10:24 a.m. ET

This Shipping Magnate Is Calling a Bottom in the Oil Rout Shipping magnate John Fredriksen is trying to buy more oil tankers despite a glut of vessels afloat, a messy restructuring of an offshore-drilling company he leads and two unsuccessful takeover attempts of rival tanker firms

Chart shows how terrible Wall Street economists are at forecasting Treasury yields By Sunny Oh Published: June 27, 2017 4:49 p.m. ET

Economists consistently underestimate 10-year Treasury yield … According to a Thursday note by Torsten Slok, chief international economist for Deutsche Bank, Wall Street analysts have been embarrassingly off the mark when asked to forecast where rates were headed. He compared the last 15 years worth of forecasts from the Fed’s Survey of Professional Forecasters and the actual path of the 10-year Treasury yield TMUBMUSD10Y, +1.95% over the subsequent 12 months. He found that forecasters erred, on average, by 60 basis points, or 0.6 percentage point, to the upside. Slok says investors can use this cumulative mistake come up with a reasonable estimate of where the 10year note is headed (see chart below). By this rough process, he says the yield for the 10-year note should be 2.3% in the next 12 months, compared with the consensus estimate of 2.9% from the Fed’s second-quarter survey.

Based on recent inflation figures, Slok’s touted forecast method may have merit. Weaker-than-expected consumer price numbers in the last three months have given the bond bulls ammunition against a Federal Reserve that has looked past the “transitory” economic data to tighten monetary policy. Treasury yields tend to move along with the fed-funds rate, the overnight borrowing costs between banks.

A New Kind of Tech Job Emphasizes Skills, Not a College Degree By STEVE LOHR

Programs promoting a skills-based labor market are gaining momentum and changing the way people are hired and trained for tech and other jobs.

‘Repeal and replace’ was once a unifier for the GOP. Now it’s an albatross. After seven years, Republicans’ promise to overhaul the health-care law is a sprawling objective still in search of a solution. It also has cost the Trump administration precious months of its first year, with tax reform and other priorities left unresolved. By Dan Balz

The GOP health-care plan threatens to kill jobs nationwide Jobs in health care and nursing homes are growing far more rapidly than in other areas By Danielle Paquette

Published 7:00 a.m. ET June 27, 2017

Gas prices stun analysts: July 4 lower than Jan. 1 Published 10:00 a.m. ET June 27, 2017

You're going to get less in Social Security than your parents

Euro hits 2017 high after Draghi hints on tapering

Bond yields rise on prospect of reduced stimulus following ECB chief’s speech

Dollar hits lowest level since November 9 as euro consolidates gains

The dollar touched its lowest level since November 9 on Wednesday and appeared on track for the lowest close since October after comments from the eurozone’s central bank president on Tuesday helped bolster the single currency.

Bond sale rules a ‘headache’ for Chinese developers 28 Jun 2017 - 5:23am

Yuan jumps after suspected central bank intervention 28 Jun 2017 - 6:41am

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…

How Much Longer Can Speculators Get of Bonds? June 27, 2017 The last six months has seen one of the most incredible changes in investor positioning in 10year US treasury bonds in recent history. Back in early January, around the time rates peaked, non-commercial traders (AKA speculators) were net short 10-year options and futures contracts by a whopping 17% of open interest. Fast forward to today and speculators are net long 10-year options and futures contracts by a relatively large 6% of open interest. In other words, the net positioning of speculators betting on 10-year rates has undergone a 23% change over the trailing six months. Speculator positioning is useful to analyze because as a group they are often positioned incorrectly at major inflection points. That is to say, by the time all the speculators are on one side of the boat, the move in the subject asset is largely over. The recent sharp change in positioning is similar to that which occurred between April-October 2010. Over that period speculators moved from a net short 18% of open interest to a net long 4% of open interest (a change of 22%) as rates fell from 4% to 2.4%. The longest speculators have been of 10-year treasury derivatives this cycle was in October 2012 when they were net long about 9% of open interest. Subsequently, the Taper Tantrum helped take rates from 1.4% to 3% and speculator positioning back to 16% short.

We are not exactly bond bears (actually, quite the opposite, as over the next 18-24 months we look towards the culmination of this late cycle environment with an inevitable recession), but the positioning in the derivatives market has our antennae piqued for a tactical trough in rates which may be coinciding with a short-term trough in economic performance.

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