US Credit Mkt WkAhd:Traders Eye Stocks,White Hse,Fed & N.Korea

By Sheila Mullan

     NEW YORK (MNI) - Traders in the U.S. Treasuries market will watch many

things next week: the White House personnel situation, U.S. stocks performance,

North Korea and last, but surely not least, the Federal Reserve official

comments at the Kansas City Fed conference.

     The Treasuries market has been roiled up and down in recent days by

speculation about the potential departures of Pres. Trump's White House

officials, said traders. White House adviser Steve Bannon Friday was said to

have left his position, said the Wall Street Journal. That pushed Treasuries

lower, stocks higher, on the view that his departure could remove some White

House uncertainty and reduce odds of a U.S./China trade war, they said.

     But the exact opposite situation occurred Thursday as U.S. stocks slid and

Treasuries rallied on speculation that White House's NEC/head economics advisor

Gary Cohn might resign, said traders, as his departure would be considered bad

for the White House tax/reform plan progress and U.S. stocks as he is a key

person for pushing forward Trump's tax plan and other programs.

     Some U.S. and European accounts did some late dip buying in Treasuries

Friday before the weekend. North Korea has been pretty quiet lately. But South

Korea and U.S. military forces had been scheduled to do large military drills

next week. However traders believe China's influence should keep North Korea

relatively quiet near-term.

     Treasuries should continue to see foreign exchange-tied buying if the U.S.

dollar weakens against the Japanese yen, as had occurred Friday early in the

day, said traders, and related selling if the U.S. dollar firms up.

     BMO analyst Ian Lyngen said "in the week ahead, the strength in the

Treasury market will surely be challenged and barring a more significant

breakout toward the 2.150% to 2.155% volume bulge in the 10-year sector, a

period of consolidation early in the week should prove the path of least

resistance."

     He added that "we're not abandoning (or disbanding) our call for lower

yields as we approach the budget/debt-ceiling debate, but will acknowledge that

the upside potential for the Treasury market is enhanced the larger the volume

base at the bottom of the yield range becomes. Said differently, the longer

we're in this low-yield environment, the more comfortable investors will be with

a continued rally."

     Lyngen added that "the relevance of position squaring is elevated as we

approach a notoriously slow period for Treasuries with vacation season peaking

and, if the number of out-of-office responses we've received is any indication,

many investors simply sitting out the most recent rally."

     TD analysts Priya Misra, Gennadiy Goldberg and Cheng Chen said U.S. rates

"have been less sensitive to declines in stocks, which we believe is a function

of dealers being long gamma, and equities remaining close to all-time highs. A

sharp equity decline could flatten the 5s/30s (Treasuries) curve, weigh on

long-end swap spreads due to VA hedging, and weigh further on TIPS breakevens."

     Bank of America/Merrill Lynch analysts Michael Hartnett and Jared Woodward

cited recent weekly data showing "risk-off flows" such as a "$1.3 billion

outflow from equities, $3.5 billion into bonds, and $0.5 billion into gold."

They added their "Bull & Bear indicator drops from very bullish 7.7 to 7.2."

They cited High Yield and Emerging Market "outflows cause the Bull & Bear

indicator to drop" with the "biggest HY bond fund outflows in almost six months

as spreads jump." They also cited the "first EM equity and debt outflows in

almost six months coincide with a bounce in the oversold US dollar."

     FTN Financial's Jim Vogel said it's important to "weigh which directions

central bank policies and economic fundamentals can go in September. We already

know the FOMC dot plot on Sept. 20 will be a critical event, as its essential

conclusions have remained unchanged for 9 months. Meanwhile US economic data

have changed considerably this year."

     Wells Fargo head of rate research Mike Schumacher and strategists Boris

Rjavinski and Zachary Griffiths expect "cross-border flows into Treasuries from

core Europe and emerging markets to continue. Foreign investors ramped up

Treasury purchases in Q2."

     They added "the ECB seems to have become a bit more hawkish, therefore

narrowing the policy gap versus the Fed." They also expected on future Treasury

supply that "the 2018 surge in Treasury issuance to cause additional flattening

pressure on the U.S. Treasury and swap curves. Net issuance could jump about

$500 billion in fiscal 2018. T-bill and front end coupon issuance could rise

disproportionately."

     The Wells team said the Treasury "volatility remains low but should pick up

soon. Fed balance sheet reduction, ECB tapering, the U.S. debt ceiling and

government budget battles, and geopolitical risks all loom as potential triggers

of higher vol." Thus they recommended "using options to protect against higher

realized vol in intermediate rates and higher implied vol in short tenors."

     The overnight repo market may see ongoing tightness next week into the late

month auctions in Treasury 2-year notes and 5-year notes. The 2-year note hit a

session tight rate in repo of -0.55% Friday, but then loosened by late morning

to about -0.03%. "There are legitimate shorts in it, but to get to -0.55% in RP,

is guys squeezing the shorts," said one trader.

     Traders also eyed the Fed's expected potential guidance at its September

19th-20th FOMC meeting on its balance sheet rundown, which could start to be

implemented in October. The Fed could unveil its balance sheet reduction

strategy -- letting Treasuries and/or MBS run off its portfolio -- at the

September FOMC meeting for an October start date, said traders. In that vein,

traders will be watching the Friday 10:00 a.m. ET speech by the Fed Chair Janet

Yellen.

     Once the 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.

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

of heavy US high-grade corporate bond issuance.

     -- 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

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21-Aug 1130 am ET US Tsy $39.0B 13-Week Bill auction

21-Aug 1130 am ET US Tsy $33.0B 26-Week Bill auction

22-Aug 0830 ** Aug Philadelphia Fed Nonmfg Index 23.4/--

22-Aug 0855 ** 19-Aug Redbook retail sales m/m -0.4/-- %

22-Aug 0900 ** Jun FHFA Home Price Index 0.4/-- %

22-Aug 0900 ** Q2 FHFA Quarterly Home Prices 1.4/-- %

22-Aug 1000 ** Aug Richmond Fed Mfg Index 14/--

22-Aug 1500 * Aug Treasury Allotments (p) --/-- b USD

23-Aug 0700 ** 18-Aug MBA Mortgage Applications 0.1%/-- %

23-Aug 0945 *** Aug Markit Services Index (flash) 54.6/--

23-Aug 0945 *** Aug Markit Mfg Index (flash) 53.3/--

23-Aug 1000 *** Jul new home sales 0.610M/0.615M

23-Aug 1030 ** 18-Aug crude oil stocks ex. SPR w/w -8.9M/-- m bbl

23-Aug 1130am ET US Tsy $13.0B 2-Year FRN auction reopening

23-Aug 1305 DalFed Kaplan guided Q&A Perm.Basin Petr.Assn Midland,TX Q/A

24-Aug KC Fed 2017 Econ Conf: Fostering Dynam. Glob Econ Jackson Hole,WY

24-Aug 0830 ** 19-Aug wkly initial jobless claims 232K/236K

24-Aug 0945 * 20-Aug Bloomberg comfort index --/--

24-Aug 1000 * Jul bldg permits revision 1.223M/--M

24-Aug 1000 *** Jul existing home sales 5.52M/5.56M

24-Aug 1030 ** 18-Aug natural gas stocks w/w 53/-- Bcf

24-Aug 1100 ** Aug Kansas City Fed Mfg Index 10/--

24-Aug 1300pm ET US Tsy $14.0B 5Y TIPS reopening auction

24-Aug 1630 ** 23-Aug Fed weekly securities holdings --/-- t USD

25-Aug KC Fed 2017 Econ Conf: Fostering Dynam.Glob Econ;Jackson Hole,WY

25-Aug 0830 ** Jul durable goods new orders +6.4%/-6.1%

25-Aug 0830 ** Jul durable new orders ex transport +0.1%/+0.5%

25-Aug 1000 ***Fed Chr Yellen speaks at KC Fed Jackson Hole Conf WY

25-Aug 1100 ** Q3 St. Louis Fed Real GDP Nowcast --%/-- %

25-Aug 1115 ** Q3 NY Fed GDP Nowcast --%/-- %

26-Aug KC Fed 2017 Econ Conference: Final Day: Jackson Hole, WY

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

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