US CreditMkt WkAhd: Traders Eye Saudis/Iran, US Tax Bills, Fed

By Sheila Mullan

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

such U.S. news as House and Senate tax plan progress and the Federal Reserve.

But the market players will be keeping a sharp eye too on the Mideast, where the

Saudi Arabia/Iran/Lebanon nexus is watched closely.

     Saudi Arabian leaders have accused certain high officials of alleged

corruption and detained some officials, said news reports this week.

     Traders cited "broad selling" in Treasuries by varied U.S. account types

Friday in some cases. But others eyed Mideast/other foreign sellers as tensions

rose in Saudi Arabia, Lebanon and in Iran.

     Some considered an unconfirmed theory that rumored heavy selling of various

US-dollar denominated assets -- which some saw across varied asset classes --

could be linked to fear of Mideast/Iran tension. "If they go to war with Iran,

they need to raise money," said one observer, speculating on what's driving

bond/other US$ asset liquidation.

     Various traders noted that this past week's bond liquidation started not in

U.S. Treasuries, but in European government bonds (EGBs) on Wednesday and

Thursday. Talk occurred midday Thursday of Mideast and Asia sales in EGBs, which

coincided with when Treasuries slid sharply for no apparent reason, traders

said. There was again talk today of more EGB liquidation, which also pressured

Treasuries, they said.

     "It does seem like there is a flow out of US dollar debt products," said

one trader at a primary dealer. "It's seems like a de-risking across dollar

assets; people may be thinking about the yearend."

     One harried trader joked of Treasuries, "We need buyers. Where are the

buyers?"

     CIBC head of rates strategy Richard Gilhooly said the market story "doing

the rounds is of liquidation of bonds starting with EGBs after Tuesday's big

rally." The EGB selling led "yields up on Wednesday and up a lot" Thursday

"possibly linked to the crackdown in Saudi Arabia and selling of investments,"

he added.

     He added Friday morning, only Bund German yields gained while peripherals

debt yields traded lower, but later, "all" such yields rose "up 4 basis points"

so "continued liquidation there" and "obviously Tsys followed suit.:

     "The steepening move is a function of yields: the Fed is hiking, so the

2-year note is stuck at 1.65%, flattening the curve when long rates drop and

vice versa."

     He adds bond liquidation could be tied too to the Lebanese prime minister's

resignation this past week, and to "Saudi detention" of some high officials for

alleged corruption "and Iran" worry "as well as boosting crude oil prices.

Nothing fundamental has changed, and if anything, tax deal hopes are lower." He

added they could be "unwinding Saudi investments and could be linked to the

deteriorating situation with Iran."

     Traders also eyed the new Fed Chair nominee Jerome Powell and the Senate

and House tax legislation. Pres. Trump on Thursday named Powell to be his

nominee for the post of Fed chair to succeed current Fed chair Janet Yellen

early next year. That had been the matter of frenzied speculation in the

financial markets in recent weeks.

     BMO analysts Aaron Kohli and Ian Lyngen said the Powell's "credibility as

an inflation fighter will be a central question for 2018 and while the departure

point of core-PCE will be an important baseline, so will one's estimate of the

neutral rate of target Fed funds in this environment.

     They added that "we're well aware that defining 'neutral' Fed funds is akin

to determining for whom the bell tolls (unless, of course, it's for yourself),

nonetheless if one believes that anything above 2% represents the transition

from normalizing to tightening, then JP (Jerome Powell) will have his finger on

the tightening trigger as early as Q2 next year. Here is our logic, December is

done and we're anticipating a March hike for 'policy continuity' if nothing

else. That brings the target funds range to 1.50-1.75%, with the effective at

1.65% in that case."

     US President Trump will continue his Nov. 3-14th trip in Asia with visits

to China and Japan watched this past week. Trump visits Vietnam on Nov. 10-11th

and the Philippines on Nov. 12-13th.

     Treasury will sell its usual weekly bill auctions Monday and then a 10-year

TIPS reopening on Thursday (see calendar below.) On Wednesday, Nov. 15, the

Treasuries market will settle the past week's November refunding auctions of

3/10/30-year Treasury auctions. 

     Also, 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.

     In other news, Canadian markets are out Monday on Remembrance Day.

     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. The Fed will

whittle down its huge $4.5 trillion Fed balance sheet, which includes $4.2

trillion in Treasuries and Mortgage-Backed Securities. The Fed bought bonds to

alleviate the market tightness since the 2008-2009 financial crisis.

     The Fed will let its Treasuries and/or MBS run off its portfolio, 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. The taper

started in MBS with the Friday Oct. 13 announcement on MBS rolldowns, while it

started in Treasuries in the end-October.

     Below is the schedule of monthly Fed reinvestment caps consistent with the

FOMC Sept. 20 decision and June 2017 addendum:

--- 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

     - Taper background (https://www.newyorkfed.org/markets/opolicy/operating

_policy_170920) And Taper policy background: (The Fed Board Taper Sep20 news

release:

https://www.federalreserve.gov/newsevents/pressreleases/monetary20170920

a1.html)

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

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

11-Nov US Veterans Day

12-Nov 1910 pm ET: Phil Fed Harker:Fed BalSht Normlaztn speech Tokyo;Q/A

13-Nov 1100 ** Nov NY Fed expectations survey --/--

13-Nov 11:30 am ET US Tsy $36.0B 26-Week T-bill auction

13-Nov 11:30 am ET US Tsy $42.0B 13-Week T-bill auction

13-Nov 1400 ** Oct Treasury budget balance $8.0B/-$49.0B

14-Nov 0600 ** Oct NFIB Small Business Index 103/--

14-Nov 0815 StL Fed Bullard:Econ/MonPol:Econ Brkfst:Louisville KY; Q/A

14-Nov 0830 *** Oct Final Demand PPI 0.4%/0.2%

14-Nov 0830 *** Oct PPI ex. food and energy 0.4%/0.2%

14-Nov 0830 *** Oct PPI ex. food, energy, trade 0.2%/-- %

14-Nov 0855 ** 11-Nov Redbook retail sales m/m -1.0%/-- %

15-Nov 0700 ** 10-Nov MBA Mortgage Applications 0.0%/--%

15-Nov 0830 *** Oct retail sales 1.6%/0.00%

15-Nov 0830 *** Oct retail sales ex. motor vehicle 1.0%/0.2%

15-Nov 0830 *** Oct retail sales ex. mtr veh, gas 0.5%/--%

15-Nov 0830 *** Oct US CPI 0.5%/0.1%

15-Nov 0830 *** Oct US CPI Ex Food and Energy 0.1%/0.2%

15-Nov 0830 ** Nov Empire Manufacturing Index 30.2/26.0

15-Nov 1000 * Sep business inventories 0.7%/0.1%

15-Nov 1000 ** Nov Atlanta Fed inflation 1.8%/--%

15-Nov 1030 ** 10-Nov crude oil stocks ex. SPR w/w +2.24M/-- m bbl

15-Nov 1600 ** Sep net TICS flows $125.0B/-- b USD

15-Nov 1600 ** Sep long term TICS flows $67.2B/-- b USD

15-Nov 1600 Boston Fed Rosengren at Northeastern EconPol Forum Boston

15-Nov 1645 pm ET:NY Fed VP Held:Fncl Crisis Lessons:bk/law panel NY

16-Nov 0830 ** 11-Nov initial weekly jobless claims --/234k

16-Nov 0830 ** Oct imports price index 0.7%/0.5%

16-Nov 0830 ** Oct exports price index 0.8%/--%

16-Nov 0830 ** Nov NY Fed Business Leaders Index 5.7/--

16-Nov 0830 ** Nov Philadelphia Fed Mfg Index 27.9/24.3

16-Nov 0910 Clevld Fed Mester: keynote at Cato Inst annl conf; DC; Q/A

16-Nov 0915 *** Oct industrial production 0.3%/0.5%

16-Nov 0915 *** Oct capacity utilization 76.0%/76.3%

16-Nov 0945 * 12-Nov Bloomberg comfort index --/--

16-Nov 1000 ** Nov NAHB home builder index 68/--

16-Nov 13:00pm ET US Tsy $11.0B 10-Yr TIPS reopening auction

16-Nov 1030 ** 10-Nov natural gas stocks w/w --/-- Bcf

16-Nov 1310 Dal Fed Kaplan at "CFA Society Houston"; Q/A

16-Nov 1545 Fed Gov Brainard keynote FinTech Conf; UMich Ann Arbor

16-Nov 1630 ** 15-Nov Fed weekly securities holdings --/-- Trln USD

17-Nov 0830 *** Oct housing starts 1.127M/1.176M

17-Nov 0830 *** Oct building permits 1.225M/1.241M

17-Nov 1000 * Q3 e-commerce retail sales 4.8%/-- %

17-Nov 1000 * Oct BLS state payrolls -59.2k/-- k

17-Nov 1000 * Q3 Advance NSA Service Revenue +3.2%/--%

17-Nov 1100 ** Nov Kansas City Fed Mfg Index 23/--

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

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

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

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