US Credit Mkt WkAhd: Traders Eye FOMC/QE Taper/Rates, N.Korea

--Traders Await FOMC Details on Expected Taper Start in October

By Sheila Mullan

     NEW YORK (MNI) - Traders in the U.S. Treasuries market will be watching

carefully as the Federal Reserve should actually unveil its taper/Fed balance

sheet reduction program at next week's two-day FOMC meeting. The market will

also pay some attention too to the North Korea/geopolitical situation.

     The Treasuries market traded Friday afternoon with a rather weak tone after

cross-market pressure from selling in UK Gilts and German Bunds, as Gilts, Bunds

and other European government bonds all closed the week near the week's high

yields. Gilts reacted negatively as normally dovish Bank of England Monetary

Policy Committee member Gertjan Vlieghe endorsed a near-term UK rate hike while

Bunds got hurt as ECB/BBK's Sabine Lautenschlaeger proved hawkish too.

     "You have a Fed meeting next week, and the BOE is being more hawkish," said

a trader. "Plus, the ECB was hawkish last week."

     And also the U.S. government bond market had some worry about next week's

FOMC meeting, where the members are expected to unveil more details on the Fed's

"tapering" of its monetary policy accommodation. The statement should include

more precise plans about how and when the Fed will start to whittle down its

huge Fed balance sheet of Treasuries and Mortgage-Backed Securities (MBS) that

were bought to alleviate the market tightness since the financial crisis that

began in 2008. The tapering could have an October start date, said traders.

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

slice its debt issuance to cope with such a runoff of Treasuries. Traders also

eyed a potential December 2017 rate hike but that is way off, with months of

inflation data ahead.

     Deutsche Bank economist Peter Hooper and his team noted that the FOMC "has

been signaling for some time that it will announce next week the commencement of

its balance sheet normalization program as described in some detail following

the June FOMC meeting."

     They added that "we assume the reinvestment tapering will begin on Oct. 1.

We expect the Committee will also signal via its economic projections, and in

Yellen's commentary during the press conference, that it still anticipates

raising rates one more time this year so long as incoming data are supporting

its projections for inflation and growth."

     SocGen analysts Bruno Braizinha and Subaddra Rajappa said "the bearish mood

is back. The past week saw a turn in risk sentiment, with a decent upward move

in bond yields. UK and U.S. inflation prints have added to this mood. Attention

now shifts to the Fed, which is expected to kick-start tapering of SOMA

reinvestments at its Sept. 20th meeting."

     They said that a "tentative rebound in global bond yields has been helped

by a global risk-on environment and, more importantly, recent signs of strength

in US and UK inflation. This makes a buildup of tightening expectations more

likely, especially for short US rates. The Fed will kick-start the normalization

of its balance sheet at the upcoming FOMC meeting which should also build some

term premiums longer out."

     Under the circumstances, market traders had some leeriness of getting too

long U.S. Treasuries, said traders. Treasuries also had supply concerns, as

primary dealers sought to unload some leftover supply after the week's

3/10/30-year auctions.

     SocGen's Braizinha projected that the cash 10-year note will "reach 2.5% by

end-2017," and continued to "anticipate some steepening pressure on the curve in

4Q17 and 1Q18, only partially offset by a repricing of the Fed's optionality."

     The U.S. Treasury will sell only one coupon auction next week: Thursday's

$11-billion 10-year TIPS reopening auction.

     Wells Fargo senior strategist Boris Rjavinski and associate strategist

Zachary Griffiths cited this past week's strong August 0.4% Consumer Price

Inflation reading and said, "A CPI beat, can it be?" They added that the CPI was

"finally showing some signs of life for U.S. inflation, both at the headline and

on an ex-food and energy basis. Seasonally adjusted headline CPI jumped to 0.4%

from 0.1% m/m, while core inflation came in at a strong 0.2% m/m.

     "The non-seasonally adjusted TIPS index came in at 245.52, besting the

244.35 consensus," they said. "These month/month increases were enough to bring

headline CPI up to 1.9% and hold core CPI steady at 1.7%, where it has remained

for the past four months."

     "Whether the sizable pop in energy prices is temporary or sustained, it

does help brighten up the carry picture in TIPS for now," they said. "Real carry

turned positive across the board while breakeven carry appears to rebound in the

near term after the initial dip due to a weaker July CPI print."

     They urged to stay with the 5/30-year TIPS breakeven steepener "through the

FOMC," a position that they urged since "the run of soft inflation data began in

March. It was meant as a defensive positioning in TIPS that allowed maintaining

overall exposure to the breakeven 'beta' while protecting the downside."

     "The 5/30 steepener has had a good run, but we are watching it closely. The

stronger August CPI report may or may not be a game changer, but it did

interrupt a run of disappointing inflation prints. Furthermore, a brightening

carry picture weakens one of the reasons to underweight 5y breakevens relative

to the long end. Still, we are sticking with it for now, more as a tactical

positioning ahead of the FOMC," they said.

     "The 5/30 breakeven curve steepened notably into the March, May, and June

FOMC meetings this year, possibly as a sign that the market continued to look to

the Fed to help boost long-term inflation prospects," they said.

     The Wells strategist also urged to "buy real yields in the front-end" and

began a "new recommendation to buy 2-year real yields. Front-end real yields do

not reflect the upside from higher fuel prices in our view."

     Going forward, Treasuries should continue to see foreign exchange-tied

buying by black box hedge funds, if the U.S. dollar weakens against the Japanese

yen. And there will be related reverse selling if the U.S. dollar firms up vs.

the Japanese yen, said traders.

     On international risks, some still expected there could be at least mild

safe-haven bid into the weekend/next week on the lingering North Korea risk. The

North Korea military fired a missile overnight over Hokkaido, Japan that

traveled also near the U.S.'s Guam territory, before finally landing in the

Pacific Ocean. The UN Security Council was scheduled to meet Friday at 3:00 p.m.

ET to address the North Korea issue.

     Traders expected some corporate rate-lock hedging action next week, in case

of heavy US high-grade corporate bond issuance in September.

     -- 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

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

18-Sep 1000 ** Sep NAHB home builder index 68/--

18-Sep 1130am ET US Tsy $42.0B 13-week Bill auction

18-Sep 1130am ET US Tsy $36.0B 26-week Bill auction

18-Sep 1600 ** Jul net TICS flows $7.7B/--

18-Sep 1600 ** Jul long term TICS flows $34.4B/--

19-Sep -- First day of 2-day FOMC policy meeting in Washington

19-Sep 0830 *** Aug housing starts 1.155M/1.170M

19-Sep 0830 *** Aug building permits 1.230M/1.218M

19-Sep 0830 * Q2 current account balance -$116.8B/-$114.9B

19-Sep 0830 ** Aug imports price index 0.1%/0.5%

19-Sep 0830 ** Aug exports price index 0.4%/-- %

19-Sep 0855 ** 16-Sep Redbook retail sales m/m +0.3%/--

20-Sep -- Second day of 2-day FOMC policy meeting in Washington DC.

20-Sep 0700 ** 15-Sep MBA Mortgage Applications 9.9%/--

20-Sep 1000 *** August existing home sales 5.44M/5.47M

20-Sep 1030 ** 15-Sep crude oil stocks ex. SPR w/w +5.9M Bbl/--

20-Sep 1400 FOMC policy announcement in Washington DC

20-Sep 1400 Fed releases Summary of Econ Projections Washington DC

20-Sep 1430 Fed Chair Yellen holds press conf in Washington DC

21-Sep 0830 ** 16-Sep Initial weekly jobless claims 284K/303K

21-Sep 0830 ** Sep Philadelphia Fed Mfg Index 18.9/18.9

21-Sep 0900 ** Jul FHFA Home Price Index 0.1%/--

21-Sep 0945 * 17-Sep Bloomberg comfort index 51.9/--

21-Sep 1000 ** Aug leading econ indicators +0.3%/+0.2%

21-Sep 1030 ** 15-Sep natural gas stocks w/w --/-- Bcf

21-Sep 1200 * Q2 domestic non-financial debt --/-- %

21-Sep 1300pm ET US Tsy $11.0B 10-year TIPS reopening

21-Sep 1630 ** 20-Sep Fed weekly securities holdings --/-- t USD

22-Sep 0600 SF Fed Williams:SNB Resrch Conf in Zurich, Switzerland Q/A

22-Sep 0930 KC Fed George keynote:Fed Oil Supply/Demnd Conf Okl.Cty Q/A

22-Sep 0945 *** Sep Markit Mfg Index (flash) 52.8/--

22-Sep 0945 *** Sep Markit Services Index (flash) 56.0/--

22-Sep 1000 ** Sep Atlanta Fed inflation 1.9%/--%

22-Sep 1100 ** Q3 St. Louis Fed Real GDP Nowcast 2.60%/--

22-Sep 1115 ** Q3 NY Fed GDP Nowcast --/--%

22-Sep 1330 DallFed Kaplan:Q&A Tlk:Fed Oil Supply/Dmnd Conf Okl.City Q/A

22-Sep 1500 * Sep Treasury Allotments (p) -- -- b USD

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

[TOPICS: MTABLE,MNUEQ$,M$U$$$,M$$FI$,MN$FI$,MN$FX$]