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Free AccessUS CreditMkt WkAhd:Traders Eye US/EU/Jpn/China Bid In 3/10/30Y
--Traders Watch Next 4Q Auction/Debt Supply
By Sheila Mullan
NEW YORK (MNI) - Traders in the U.S. Treasuries market expect good demand
from the U.S., Japanese, Chinese and European buyers at the 3/10/30-year August
refunding auctions fare in the August 7th week.
Treasury will sell $24 billion 3-year notes Tuesday, $23 billion 10-year
notes Wednesday, $15 billion 30-year bonds Thursday. SMRA analyst John Canavan
said the auctions "will raise a combined $14.687 billion from the public, after
accounting for maturing issues and Fed holdings," down vs. $12.337 billion at
the May Refunding."
"The 3-year note auction will pay down approximately $3.000 billion after
accounting for a $27.000 billion maturing 3-year note," he said. "The 10-year
auction will raise approximately $7.510 billion after accounting for the $15.490
billion maturing 10-year note, excluding SOMA holdings, and the 30-year bond
auction will raise $10.177 billion after accounting for the $4.823 billion
maturing bond, excluding SOMA holdings."
Recent Japanese Ministry of Finance data and traders' reports suggest there
should be good Japanese demand at the auctions. Japanese accounts feel the U.S.
economy will bump along and Fed could be on hold, so they are jumping to buy,
including Japanese Post Bank (Kampo) and mega-banks, some said. (The Japanese
are the largest No. 1 foreign holder of U.S. Treasuries with an 18.1% share in
May 2017 TICS data at $1.1113 Trillion, while No. 2 holder mainland China had an
18.0% share that month at $1.1022 Trillion.)
And Japanese accounts did good buying in Treasuries last week as Japanese
MOF data showed net buyers of foreign bonds of Y106.70 (US$9.6 billion). That
occurs as Japanese accounts had sold Treasuries fairly heavily after Donald
Trump's November 2016 US presidential election win, as they feared he would
stoke growth, or cut U.S. taxes. Such Japanese selling lasted until about
February 2017. Then the progress on the Trump tax plan and stock-boosting
initiatives slowed in March and April, so since then, Japanese buyers were
"particularly active," as one trader said.
"They have been buying," said a trader. "I expect them to be in buying
until the bubble pops," when they could be hurt along with other Treasuries
investors, he said. "They continue to find Treasuries a very attractive place to
put their money. They are encouraged by the fact that the Fed is perceived to be
on hold. They prefer to buy Treasuries when the market goes up. But when
Treasuries get whacked" by a selloff, "they scurry to the sidelines."
Another observer however noted Japanese accounts proved to be "good buyers
over the month of July" but maybe have become "a little bit sated at this point.
Unless there is a sharp backup in yields, we expect 'moderate' participation in
the auctions," said the observer.
BMO's Ian Lyngen said this week's Japanese MOF data "again confirms"
Japanese buyers "have re-engaged and are adding exposure to overseas notes and
bonds (primarily Treasuries if the historical patterns hold). Specifically,
during the week ended July 28th, investors from the region purchased a net of
$9.6 billion versus buying of $10.6 billion in the prior week. That marks the
fourth consecutive week of buying for a total of $35.7 billion."
On a related note, Japanese accounts such as Kampo (Japanese Post Bank) and
Japanese mega-banks "tend to center in on the 7-year note to 10-year notes" in
Treasuries buying, said an observer.
Chinese demand was also expected at the 3/10/30-year Treasury auctions,
said traders. "The China foreign exchange reserves and their Treasuries holdings
are both growing," said one trader. "They tend to buy the whole curve" in
Treasuries.
European demand should show up at the 3/10/30-year auctions as Treasuries
are "cheap to the European debt," said one trader.
Traders will seek views on how Friday's stronger than expected 209,000 U.S.
July jobs report will affect the inflation-sensitive U.S. government bond
market. While Treasuries sold off initially on the jobs report, the market cut
much of its losses by late afternoon, said traders. "That this doesn't change
the Fed story into the second half of the year," said BMO analyst Ian Lyngen.
The Federal Reserve 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, said traders. The Treasury then would have to
figure out how to adjust its debt issuance to cope with such a runoff.
Jefferies chief financial economist Ward McCarthy said the "week ahead will
again be busy. The Fed calendar of public appearances will feature a press
briefing by NY Fed President Dudley, along with appearances by regional bank
presidents Bullard, Kashkari and Kaplan."
He added "the active data calendar will feature Q2 productivity and Unit
Labor Costs, the JOLTS data and two of the three primary inflation releases.
Jefferies Economics projects an acceleration in productivity but a deceleration
in ULC relative to Q1, a moderate rise in the PPI and a minimal uptick in the
CPI."
TD analyst Gennadiy Golberg urged to "remain short" EDZ8 Eurodollar futures
"as we look for the market to price in more hikes this year and in 2018."
"Given a likely rebound in rate hike pricing following the report," he
expects " further flattening pressure on the 5/30-years curve," and urged to
"hold onto our front end shorts and 5-year/30-year flatteners for now" in
Treasuries.
Wells Fargo strategists Boris Rjavinski and Zachary Griffiths said the
latest August Treasury quarterly refunding announcement "showed no changes to
the projected auction sizes or financing needs in the near term." But "net
Treasury issuance is projected to jump in fiscal year 2018 by $311 billion from
$544 billion to $855 billion, according to the primary dealer survey. FY 2018
begins on Oct. 1, 2017, so greater net Treasury issuance may be kicking in
soon," they said.
"The anticipated boost in the net issuance will help Treasuries cement its
position as the largest sovereign debt market in the world, by far," they said.
"In fact, it may approach an important, albeit somewhat controversial,
milestone: $15 trillion in outstanding marketable Treasury debt. Marketable
securities consist of bills, notes, bonds and TIPS and are traded on the
secondary market."
"The exact mix for new issuance, however, remains up for debate," the Wells
analysts said. "Assuming that Treasury keeps the bills/coupons breakdown and the
coupon maturity mix within new issuance in FY 2018, we may get about net $184
billion in T-bills and $671 billion in coupons."
"A sizable increase in net supply could put some added upward pressure on
yields, all else being equal," they said. "The short and intermediate sector may
end up absorbing the bulk of increased borrowing needs. Furthermore, foreign
demand for Treasuries seems to have been reinvigorated lately. Domestic retail
investors have shown to be adept at boosting" Treasuries holdings if yields rose
meaningfully."
And black box hedge funds may trade Treasuries inversely vs. the U.S.
dollar/yen, said traders.
-- 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
---------------------------------------------------------------------
07-Aug 1000 Jul ETI 133.1/--
07-Aug 1000 Jul Fed LMCI 1.5/
07-Aug 1130 am ET US Tsy $39.0B 13-Week Bill auction
07-Aug 1130 am ET US Tsy $33.0B 26-Week Bill auction
07-Aug 1145 am ET StL Fed Bullard econ/pol:cotton conf Nashville TV Q&A
07-Aug 1325 pm ET MinFed Kashkari in guided Q&A Sioux Falls Rotary S.D.
07-Aug 1500 Jun consumer credit $18.4B/$14.8B
07-Aug 1500 Jul Treasury Allotments (final) --/-- b USD
08-Aug 0600 Jul NFIB Small Business Index 103.6/--
08-Aug 0855 05-Aug Redbook retail sales m/m -1.2%/-- %
08-Aug 1000 Aug IBD/TIPP Optimism Index 50.2/--
08-Aug 1000 Jun JOLTS job openings level 5666K/-- k
08-Aug 1000 Jun JOLTS quits rate 2.2%/-- %
08-Aug 1300 pm ET US Tsy $24.0B 3-Year Note auction
09-Aug 0700 04-Aug MBA Mortgage Applications -2.8%/-- %
09-Aug 0830 Q2 non-farm productivity (p) 0.0%/1.0%
09-Aug 0830 Q2 unit labor costs (p) 2.2%/0.9%
09-Aug 1000 Jun wholesale inventories 0.6%/--%
09-Aug 1000 Jun wholesale sales -0.5%/-- %
09-Aug 1030 04-Aug crude oil stocks ex. SPR w/w -1.5MB/-- m bbl
09-Aug 1100 Jul Kansas City Fed LMCI 1.30/--
09-Aug 1300 pm ET US Tsy $23.0B 10-Year Note auction
10-Aug 0830 05-Aug Initial weekly jobless claims --/-- k
10-Aug 0830 Jul Final Demand PPI 0.1%/0.2%
10-Aug 0830 Jul PPI ex. food and energy 0.1%/0.2
10-Aug 0830 Jul PPI ex. food, energy, trade 0.2%/--
10-Aug 0945 06-Aug Bloomberg consumer comfort index --/--
10-Aug 1000 NY Fed Dudley opens Econ Press Briefng On Wage Ineql NY Q&A
10-Aug 1030 04-Aug natural gas stocks w/w --/-- Bcf
10-Aug 1300 pm ET US Tsy $15.0B 10-Year Bond auction
10-Aug 1400 Jul Treasury budget balance -$90.2B/-$76.0B
10-Aug 1630 09-Aug Fed weekly securities holdings --/-- t USD
11-Aug 0830 Jul CPI 0.0%/0.2%
11-Aug 0830 Jul CPI Ex Food and Energy 0.1%/0.2%
11-Aug 0940 Dal Fed Kaplan:Univ Tex/Arlngtn Accntg Dept CPE Day Q&A
11-Aug 1100 Q3 St. Louis Fed Real GDP Nowcast --/-- %
11-Aug 1115 Q3 NY Fed GDP Nowcast --/-- %
11-Aug 1130 MinnFed Kashkari Q&A Indepndt Comm Bankers Minn Conventn MN
--MNI New York Bureau; tel: +1 212-669-6432; email: sheila.mullan@marketnews.com
[TOPICS: MTABLE,M$U$$$]
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MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.