US CreditMkt WkAhd: Traders Eye Risk/US$ Funding/YrEnd,Mideast

--Jefferies' McCarthy, Simons: Very Key To Watch RP/US$ Funding

By Sheila Mullan

     NEW YORK (MNI) - Traders in the U.S. Treasuries next week will watch the

U.S. dollar funding market next week for signs of a year-end tightening funding

squeeze as Thursday's Thanksgiving ushers in the lighter U.S. holiday season

trading.

     Meanwhile traders also will watch progress of the House and Senate tax

plans, and the Federal Reserve. 

     But traders will keep a sharp eye too on the Mideast, where the Saudi

Arabia/Iran/Lebanon nexus is watched closely. Saudi Arabian leaders in recent

weeks have accused certain high officials of alleged corruption and detained

some officials.

     Bond traders eyed risks into the Dec. 29 year-end that could make markets 

volatile, especially a US dollar funding shortage as banks trim balance sheets

into year-end, keeping US$ funding in-house so as to fortify their

quarterly/year-end earnings. Consider what's ahead and the recent past:

- Nov. 10: Talk Asia/Mideast sales in stocks/commods/risk assets on

Mideast/Saudi/Iran woes 

- Nov. 13/14: Talk banks sold China bonds to raise cash, tight liquidity; China

10Y yld over 4% 

- Nov. 16th: China adds $47 Bln to its banking system (via 7-day, 14-day, 63-day

Reverse Repos); FT: "largest intervention in a year." 

- Nov. 16th: GOP-dominated US House passed tax bill along party lines. 

- Nov. 23: US Thanksgiving US bond market holiday. 

- Nov. 24: EU Chief Negotiator needs to see enough Brexit progress by then, to

urge EU Parliament talks to next stage.

- Nov. 24th Friday : Early US bond mkt close: 2pm ET cash bonds, 1pm ET

financial futures. 

- Nov. 29: Fed Chr Yellen testifies at Congressional Jt Econ panel on US econ

outlook 

- Dec. 4: Eurogroup meeting 

- Dec 8: Temporary US debt Ceiling lift expires 

- Dec. 12-13: FOMC may hike Fed Funds Rate by 25bp 

- Dec. 14-15: EU Summit Meeting 

- Dec. 21: Spain Catalonia vote 

- Dec. 29: Most US Banks' year-end, month/quarter end; German Banks may shy away

from lending as their deposit insurance is based on yearend balances.

     Treasuries ended Friday mainly stronger/flatter amid a weak US dollar/yen

in the morning and firmer German Bunds. The risk markets at first had a decent

bid with Treasuries weaker. But then, risk assets weakened into the weekend and

next week's lighter-volume holiday week with Thursday's Thanksgiving holiday and

short Friday. The cash U.S. bonds close 2 p.m. ET Friday and 1 p.m. ET for

financial futures. US high-grade and high-yield/junk secondary corporate bonds

traded better early Friday then weakened.

     Jefferies economists Ward McCarthy and Tom Simons said "for the market this

week, it is hard to construct an argument against the continuation of the

relentless flattening" in US Treasuries "that has gone on for the past several

weeks."

     "The most interesting market to watch might be repo as the dearth of cash

in the market continues to pressure funding," they said.

     The Jefferies economists said Treasuries movement was "mixed" this past

week as "the curve continued to flatten" amid a "very busy week for data," which

"showed that the economy has rebounded from the hurricanes that hit the Gulf

states in August and September."

     They added October CPI "seemed to signal an "all-clear" for a December rate

hike, as there was a noticeable drop-off in talk about concern about the

inflation environment in the Fedpeak that trickled out throughout the week."

Traders also eyed signals from the FOMC meeting minutes out Wednesday.

     BMO's Ian Lyngen and Aaron Kohli said "in the week ahead, attention will

shift from fives/bonds" curve action to Thanksgiving. "The holiday shortened

week offers remarkably little in terms of new information and as the beginning

of year-end preparations commence, we find ourselves unwilling to play for any

dramatic directional shift in the Treasury market," they said.

     They added that "any in-range backup in Treasury yields that further adds

to the volume base established in the 10-year sector between 2.30% and 2.40%

will be met with buying interest as the curve flattening conundrum persists."

     "We're open to a period of choppy price action in both the curve and

outright level of yields, but ultimately anticipate 5s/30s will touch 64 bp

before any material retracement and continue to target a revisit of 2.25% 10s,"

the BMO team added. (The 5/30-year curve is now at +72.30 basis points late

Friday.)

     RBC rates strategists Michael Cloherty and Ashutosh Kamat noted the "Fed

and Treasury will hold their "third annual conference on the Structure of the US

Treasury Market on Nov. 28. Unfortunately, the Senate Banking Committee

scheduled a confirmation hearing for Powell at 10 a.m. that morning, meaning

attention will flip back and forth between Powell and Mnuchin that morning."

     They added the "major focus is likely to be on whether or not there will be

the public release of TRACE data for Treasuries. Since the summer, regulators

have been collecting and analyzing trade data from FINRA members, but have not

been capturing trade data from non-FINRA members (a growing part of the market).

Nonetheless, we think the debate about public release" of Treasuries data "will

be white-hot."

     They added "TRACE originally started because there was such poor price

visibility in the corporate market that less sophisticated investors sometimes

overpaid. But there is already spectacular price visibility in Treasuries; what

TRACE for Treasuries is about is flow visibility rather than price visibility."

     The strategists noted on TRACE/Treasuries that "someone who can identify

trading patterns that signal hedging of a very large client flows can

anticipate" price moves from "flows" and if they're "fast enough" can then do

positns before hedges "to take advantage of" info. "Currently identifying those

patterns is not simple because price movements are visible. But many flows are

not, making it more difficult to separate out random price movements from

flow-driven price movements."

     They added that if "flow data" were "public even with a significant lag,

anyone trying to identify hedging patterns can zero in" on "price action

immediately after a large trade," and "tweak" their algo models to adjust

"prices and positions well" before "hedging flows" are done. They said off-run

Treasuries "are problematic. From a liquidity perspective, off-the-run and

on-the-run Treasuries are different asset classes" as "time needed to move risk

in a deep off-the-run is often measured in weeks" not "microseconds." Trade data

publication "will make intermediaries even more wary of taking positions in

off-the-runs, exaggerating the on-the-run/off-the-run liquidity differential,"

they said.

     Meanwhile, the Fed also has begun its gradual tapering, or slow reduction

of its $4.5 trillion balance sheet, which has $4.2 trillion in U.S. Treasuries

and in Agency MBS. Before any potential December rate hike, the Federal Reserve

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

its Treasuries and Mortgage-Backed Securities (MBS). The Fed had bought bonds to

alleviate the market tightness since the financial crisis of 2008-2009. Now it

will let both Treasuries and MBS run off its portfolio. 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. 

Below is the schedule of monthly Fed reinvestment caps:

--- 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/MNI Econ Poll Median Estimates

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

18-Nov 12:45pm ET SF Fed Williams on global econ panel; Berkeley, CA

20-Nov 1000 ** Oct leading indicators -0.2%/0.6%

20-Nov 1130am ET US Tsy $36.0B 26-Week Bill auction

20-Nov 1130am ET US Tsy $42.0B 13-Week Bill auction

21-Nov 0830 ** Nov Philadelphia Fed Nonmfg Index 32.2/--

21-Nov 0855 ** 18-Nov Redbook retail sales m/m -1.2%/-- %

21-Nov 1000 *** Oct existing home sales 5.39M/5.41M

21-Nov 1130 am ET: US Tsy $13.0B 2-Year FRN reopening auction

21-Nov TBA: 4-week T-bill Auction (time size to be announced Nov.20)

22-Nov 0700 ** 17-Nov MBA Mortgage Applications 3.1%/-- %

22-Nov 0830 ** 18-Nov jobless claims 249K/240K

22-Nov 0830 ** Oct durable goods new orders 2.0%/0.4%

22-Nov 0830 ** Oct durable new orders ex transport 0.7%/0.5%

22-Nov 1000 *** Nov Michigan sentiment index (f) 97.8/--

22-Nov 1030 ** 17-Nov crude oil stocks ex. SPR w/w +1.85M/-- m bbl

22-Nov 1200 ** 17-Nov natural gas stocks w/w --/-- Bcf

22-Nov 1400 Fed releases minutes from Oct.31-Nov 1 FOMC meeting WA

22-Nov 1500 * Nov Treasury Allotments (p) --/-- B USD

22-Nov 1630 ** 15-Nov Fed weekly securities holdings --/-- t USD

23-Nov Thursday Thanksgiving US public holiday

24-Nov 0945 *** Nov Markit Mfg Index (flash) 54.6/--

24-Nov 0945 *** Nov Markit Services Index (flash) 55.3/--

24-Nov 0945 * 19-Nov Bloomberg comfort index 52.1/--

24-Nov 1100 ** Q4 St. Louis Fed Real GDP Nowcast --/-- %

24-Nov 1115 ** Q4 NY Fed GDP Nowcast --/-- %

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

[TOPICS: MTABLE,MNUAU$,M$U$$$,M$$FI$]