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By Sheila Mullan
     NEW YORK  - Traders in the U.S. Treasuries will focus on winding down their
trading into the new year, but also on the week's big event, the tax reform plan
agreed to in principle by House and Senate committee members on Wednesday.
The Associated Press said the House and Senate have passed an agreement in
principle on the tax pact, and that there will be a floor vote on that in the
Dec. 18th week.
In other action, traders will also be watching for any development on the U.S.
Treasury debt limit, recently extended for two weeks to December 22.
But one observer quipped that "no one wants to have to mess around" with a U.S.
government shutdown three days before Christmas, Monday, Dec. 25th. Plus Dec.
22nd is a short session, with the U.S. government bond market shutting down at
1400ET, while U.S. financial futures close down at 1300ET.
Traders still digested this week's FOMC meeting outcome, which had a
25-basis-point rate hike. The meeting 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 March.
The FOMC Wednesday raised its Fed Funds Rate to 1.25%-1.50% on 7-2 vote, with
two dissents in favor of no rate hike. There was little change in the statement,
and the dots suggest 3 hikes in 2018. It also said the median expectation for
rates at the end of each year were unchanged for 2018 (2.1%) and 2019 (2.7%),
but the outlook for 2020 was bumped up to 3.1% from 2.9%. The FOMC still expects
"gradual increase" in the funds rate and risks remain "roughly balanced," it
The economic projections show bumped up expectations for GDP in 2018, with a
lower unemployment rate (3.9%) expected for 2018 and 2019, and for 2020 (4.0%).
Core PCE inflation expectations were unchanged.
NatWest strategist Blake Gwinn noted "the dot medians shows 3 hikes for 2018
(unchanged from September), 3 hikes for 2019 (unchanged from September), and a
slight move up in 2020 from 2.9% to 3.1%. One notable change was to the 2018
median GDP growth, which was revised from +2.1% to +2.5%. In the statement, the
Fed continued to signal strong growth in the labor market and continued
expectations that inflation would return to target (2018 PCE deflator forecasted
to be 1.9% still)."
LBBW's Karl Haeling said "a growing number of market observers see the
prospective US tax changes as bearish for Treasuries, including long-dated
maturities which have been moving sideways in recent years. Yet, 10- and 30-year
maturities simply have not sustained any significant sell-off and actually
rallied strongly on Wednesday, with shorter maturities outperforming."
Haeling added that "bears argue that bond prices will simply start falling
suddenly and sharply in the not-to-distant future. But there are reasons why
this may not occur at all, and over the remainder of the year, technical
considerations could actually drive the whole Treasury market higher and the
yield curve steeper."
He said that "immediately ahead, traders and investors face pressure to square
positions ahead of year-end. Many investors/traders are underweight their
duration targets and/or are outright Eurodollar futures and 2- and 5-year notes.
There are also a lot of yield curve flattening positions on."
"So now, with the latest Fed rate hike and U.S. tax prospects unable to generate
a more bearish environment, the pressure to unwind outright short and yield
curve flattening positions will simply increase," Haeling said.
LBBW's Haeling said "with the long end of the Treasury curve not showing big
worries about the risk of stronger economic growth and/or inflation, traders
with short positions cannot count on a Fed rate hike in March with strong
conviction. So with short-dated yields having risen much faster than financing
rates in recent months, the negative carry cost of holding short positions has
increased. This will further increase short-covering pressures."
Haeling still believed "that if Republicans actually push through the tax code
changes as fast as they are attempting, it will be loaded with a lot of
unintended consequences that are more likely to be economically negative than
positive. And while there is so much talk of tax cuts, many consumers in high
tax states like New York and California, which hold the country's biggest
regional economies, face tax hikes (in some cases big increases)."
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 debt ceiling resolution in shorter maturities." He
added that "our Y2k analogy reflects parabolic stock markets on tax hopes and
liquidity, sadly as the liquidity withdrawal has already begun."
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 continues to gradually reduce its $4.5 trillion balance sheet
($4.2 trillion in U.S. Treasuries and Agency MBS.) Below is the chart schedule
of monthly Fed reinvestment caps consistent with the FOMC Sept. 20 decision and
June 2017 addendum:
- 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? 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 18 Tsy $39B 3-Month Bill auction (announced Dec.14) 1130ET
- Dec 18 Tsy $45B 6-Month Bill auction (announced Dec.14) 1130ET
- Dec 18 Dec NY Fed Business Leaders Index 18.9/-- 0830ET
- Dec 18 Dec NAHB home builder index 70/-- 1000ET
- Dec 19 *** Nov housing starts 1.29M/1.252M 0830ET
- Dec 19 *** Nov building permits 1.316M/1.265M 0830ET
- Dec 19 * Q3 current account balance -$123.1B/$116.8B USD
- Dec 19 ** 16-Dec Redbook retail sales m/m -0.7%/-- % 0830ET
- Dec 19 US Treasury four-week T-Bill auctn (announce Dec18) 1130ET
- Dec 19 Minn Fed Kashkari Q&A:Lambda Alpha Intl, Roseville, Minn. 1310ET
- Dec 20 ** 15-Dec MBA Mortgage Applications --%/-- % 0700ET
- Dec 20 *** Nov existing home sales 5.48M/5.51M 1000ET
- Dec 20 ** 15-Dec crude oil stocks ex. SPR w/w --/-- m bbl 1030ET
- Dec 21 ** 16-Dec jobless claims 225k/233k 0830ET
- Dec 21 *** Q3 GDP (3rd) 3.3%/3.3% 0830ET
- Dec 21 *** Q3 GDP Price Index 2.1%/2.1% 0830ET
- Dec 21 ** Dec Philadelphia Fed Mfg Index 22.7/21.8 0830ET
- Dec 21 ** Oct FHFA Home Price Index 0.3%/-- % 0900ET
- Dec 21 * 17-Dec Bloomberg comfort index --/-- 0945ET
- Dec 21 ** Nov leading indicators 1.2%/0.4% 1000ET
- Dec 21 ** 15-Dec natural gas stocks w/w 69/-- Bcf 1030ET
- Dec 21 $14B US Treasury 5-year TIPS reopening 1300ET
- Dec 21 ** 20-Dec Fed weekly securities holdings --/-- t USD 1630ET
- Dec 22 ** Nov durable goods new orders -0.8%/2.0% 0830ET
- Dec 22 ** Nov durable new orders ex transport 0.9%/0.5% 0830ET
- Dec 22 ** Nov personal income 0.4%/0.4% 0830ET
- Dec 22 ** Nov current dollar PCE 0.3%/0.4% 0830ET
- Dec 22 ** Nov total PCE price index 0.1%/--% 0830ET
- Dec 22 ** Nov core PCE price index 0.2%/0.1% 0830ET
- Dec 22 ** Dec Philadelphia Fed Nonmfg Index 19.3/-- 0830ET
- Dec 22 *** Nov new home sales 685K/660K 1000ET
- Dec 22 * Nov bldg permits revision --M/--M 1000ET
- Dec 22 *** Dec Michigan sentiment index (f) 96.8/97.1 1000ET
- Dec 22 * Nov BLS state payrolls 240.7K/--k 1000ET
- Dec 22 ** Dec Kansas City Fed Mfg Index 16/-- 1100ET
- Dec 22 ** Q4 St. Louis Fed Real GDP Nowcast --%/--% 1100ET
- Dec 22 ** Q4 NY Fed GDP Nowcast --%/--% 1115ET
- Dec 22 US Financial Futures Early Close 1300ET
- Dec 22 US Cash Bonds/Treasuries Early Close 1400ET
- Dec 22 Dec Treasury Allotments (p) --/-- b USD 1500ET
--MNI New York Bureau; tel: +1 212-669-6432; email:

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