REPEAT: US Credit Mkt Wk Ahd:Traders Eye 2/5/7Y, Debt Limit

Repeats Story Initially Transmitted at 17:19 GMT Dec 22/12:19 EST Dec 22

--Traders Watch for Month/Yr-End Buying/Position Tweaks

By Sheila Mullan

     NEW YORK  - Traders in the U.S. Treasuries next week will focus on winding

down their trading into the New Year, but also on averting a government shutdown

by boosting the debt limit temporarily.

     The US House and Senate both passed a temporary continuing resolution bill;

such lifting had been scheduled to expire Friday, Dec. 22nd, after being

extended on Dec. 8th. All that needs to be done to keep the U.S. government

running is to get Pres. Trump's signature on the matter.

     But traders joked that no one wants to have to mess around with a U.S.

government shutdown into Christmas, Monday, Dec. 25th. Plus Friday, Dec. 22nd,

is a short session, with the U.S. government bond market shutting down at 2:00

p.m. ET, while U.S. financial futures close down at 1:00 p.m. ET.

     And financial markets watched Friday as the U.S. president signed the

important U.S. tax reform bill passed by the Congress this past week.

     --TAX PLAN IMPACT

     "The Tax Cuts and Jobs Act (TCJA) will take effect somewhat sooner than we

expected, in 1Q18 instead of 2Q18," said JPM economist Michael Feroli. "It is

also somewhat larger than expected in the next few years, before a few important

measures are scheduled to sunset."

     --HEAVY TREASURY AUCTION CALENDAR

     Traders also eyed a heavy slate of Tsy coupon auction supply next week:

2-year, 5-year, 7-year notes and 2-year FRN reopening. The U.S. Treasury will

sell a $26 billion 2-year note auction at 1:00 p.m. ET Tuesday, a $13 billion

2-year Floating Rate Note Reopening auction at 11:30 a.m. ET Wednesday with the

$34 billion 5-year note auction following at 1:00 p.m. ET that day, and finally

a $28 billion 7-year note auction at 1:00 p.m. ET Thursday.

     "We'll see what happens next week with supply," said one trader. "It may be

a bit harder than normal. We may have to back it up a bit" in yield "to get it

done," he added, alluding to a need for a pre-auction concession to cheapen up

the issues. However, most will not sell the market yet until they get through

the long Christmas weekend holiday.

     The Bloomberg/Barclays U.S. Treasuries month-end duration index extension

was estimated at 0.07 years while agencies index extends 0.12 years; the Tsys

index extension could potentially help the 5-year or 7-year note demand.

     Traders said it's hard to say how much Japanese demand there would be.

"They have been pretty light" in Tsys action this week," said one observer.

     JPM analysts Jay Barry and Jason Hunter said for now and 2018, "there is

significant room for the curve to flatten as distinct factors will drive the

front end and long end. At the front end, we expect the Fed to tighten 4 times

in 2018, excess reserve balances to decline by $575bn, and most of the $1.3tn in

net Tsy issuance we project is likely to be focused in T-bills" and 2-yr to 5-yr

notes. Such "factors should help drive yields in the 2- to 5-yr sector well

above the forwards," they said.

     They eyed long end factors: "weaker potential growth suggests" neutral FFR

"is significantly lower than levels in the last tightening cycle", so may "act

as somewhat of an anchor on long-term yield. That being said, we have been

hesitant to add flatteners, as the curve had run ahead of its fundamental

drivers."

     But they said with "curve steepening sharply" in 1st half this week,

"valuations no longer appear stretched: the 5s/30s curve traded as much as 11bp

too flat at the end of last week, and now appears fairly valued after adjusting

for the level of front-end yields, medium-term inflation expectations" and VA

insurance company's hedging needs.

     And JPM analysts also said on the 5/30-year U.S. Treasuries curve that

"more tactically, we think there is room for the curve to flatten over the

coming week as well."

     "Treasury is set to auction $101bn in supply in a period typically

characterized by deteriorating liquidity: our work shows that 10-year Treasury

market depth has tended to decline by over 40% in the final weeks of December,"

they said.

     "Moreover, there is a seasonal tendency for the curve to flatten over this

period. The 5s/30s curve has flattened more than 10bp, on average, in the last

two weeks of the year, and this has occurred in 8 of the last 10 years," they

said. "Therefore, with valuations now fair, the medium-term outlook supportive

of flattening, and year-end seasonals pointing to flattening as well, we

recommend initiating 5s/30s flatteners."

     Odeon Capital technical strategist John Spinello said the Treasuries

"technical setup" is "oversold on all. The negative setup has market poised for

higher rates but not without corrective activity. The seasonal rising rate cycle

will have the market in sell strength mode as we attempt to measure strength

derived by overbought bounce, and next week's month-end along with supply of

2-yr/5-yr/7-yr auctions."

     He projects cash 10-year note "support zone at 2.50%/2.525% at multi-month

high yield/3-sigma extreme" and "resistance is found at 2.463%/2.44%

retracements. Expecting more consolidation into the long weekend as we continue

trade, with all at oversold extremes buffering downside."

     Traders heading into the New Year will be thinking about next year's

Federal Open Market Committee, which will be chaired starting in February by Fed

Gov. Jerome Powell, replacing outgoing Fed Chair Janet Yellen.

     The FOMC just raised the key U.S. fed funds rate by a 25-basis-point rate

hike to a 1.25%-1.50% range on Dec. 13th. also included outgoing chair Fed Chair

Janet Yellen's final news conference as sitting Fed chair. Incoming Fed Chair

Jerome Powell will be running the show at the next Fed news conference by the

Fed Chair, which will be in February.

     CIBC head of rates strategy Richard Gilhooly said that US fiscal stimulus

"will raise GDP over the next year, possibly by 1% along with deregulation

measures, leading the Fed to hike more aggressively next year." Gilhooly added

the US Treasury "will fund the Fed's rising run-offs and its own cash balance

needs after the debt ceiling resolution in shorter maturities."

     And traders will watch the Saudi Arabia/Iran/Lebanon news and North Korea,

too. And Dec. 29 yearend could be volatile, as banks trim balance sheets,

keeping dollar funding in-house to fortify yearend earnings.

     Also, Treasuries should see foreign exchange-tied buying by black box hedge

funds, if the U.S. dollar weakens against the Japanese yen, or selling if the

dollar firms, said traders.

     Meanwhile, the Fed also gradually is reducing its $4.5 trillion balance

sheet ($4.2 trillion in U.S. Treasuries and Agency MBS.) The Federal Reserve

started its taper/Fed balance sheet reduction program in October to whittle down

its huge balance sheet of bonds bought to alleviate market tightness since the

2008-2009 financial crisis.

     Once tapering begins, the U.S. Treasury would have to figure out how to

slice its debt issuance to cope with such a Treasuries runoff. The taper started

in MBS with the Friday Oct. 13 announcement on MBS rolldowns, and started at the

end of October in Treasuries.

--- MONTHLY CAPS ON SOMA SECURITIES REDUCTIONS --------------

US TREASURIES.../AGENCY MBS/MONTH CAP 

- Oct-Dec 2017.. $6 billion./$4 billion 

- Jan-Mar 2018.. $12 billion/$8 billion 

- Apr-Jun 2018 $18 billion../$12 billion 

- Jul-Sep 2018 $24 billion../$16 billion 

- From Oct 2018** $30 billion $20 billion

-- Questions? sheila.mullan@marketnews.com 212-669-6432; story also reflects

contributions from Giovanny Guerrero of MNI/New York.

-- A calendar of market events (data, Fed speakers) is below: 

Date/Time ET Prior Data/And MNI Econ Poll Median Estimates

---------------------------------------------------------------------

- Dec 26 0900 ** Oct Case-Shiller Home Price Index 0.5/--

- Dec 26 1000 ** Dec Richmond Fed Mfg Index 30/--

- Dec 26 1030 ** Dec Dallas Fed manufacturing index 19.4/--

- Dec 26 1130 am ET US Tsy $39B 6-Month Bill auction

- Dec 26 1130 am ET US Tsy $45B 3-Month Bill auction

- Dec 26 13:00pm ET US Tsy $26B 2Y Note Auction

- Dec 26 13:00pm ET US Tsy $50B 4-Week T-Bill Auction

- Dec 27 0700 ** 22-Dec MBA Mortgage Applications -4.9/-- %

- Dec 27 0855 ** 23-Dec Redbook retail sales m/m -0.4%/-- %

- Dec 27 1000 ** Nov NAR pending home sales index 109.3/--

- Dec 27 1000 *** Dec Conference Board consumer confidence 129.5/128

- Dec 27 1030 ** Dec Dallas Fed services index 20.4/--

- Dec 27 11:30 am ET US Tsy $13B 2Y FRN reopening auction

- Dec 27 13:00 pm ET US Tsy $34B 5Y Note Auction

- Dec 28 0830 ** 23-Dec jobless claims 245K/238K

- Dec 28 0830 ** Nov advance goods trade gap -$69.1B/-- b USD

- Dec 28 0830 ** Nov advance wholesale inventories -0.4%/-- %

- Dec 28 0830 ** Nov advance retail inventories -0.1%/-- %

- Dec 28 0900 * Dec ISM-Milwaukee Mfg Index 59.62/--

- Dec 28 0945 ** Dec MNI Chicago PMI 63.9/64.0

- Dec 28 0945 * 24-Dec Bloomberg comfort index --/--

- Dec 28 1030 ** 22-Dec natural gas stocks w/w --/-- Bcf

- Dec 28 1100 ** 22-Dec crude oil stocks ex. SPR w/w -6.5/-- m bbl

- Dec 28 13:00pm ET US Tsy $28B 7Y Note Auction

- Dec 28 1500 * Nov farm prices -5.2%/-- %

- Dec 28 1630 ** 27-Dec Fed weekly securities holdings --/-- t USD

- Dec 29 1100 ** Q4 St. Louis Fed Real GDP Nowcast +3.02%/-- %

- Dec 29 1115 ** Q4 NY Fed GDP Nowcast +3.9%/-- %

--MNI New York Bureau; tel: +1 212-669-6432; email: sheila.mullan@marketnews.com

[TOPICS: MTABLE]