Showing posts with label Microeconomics. Show all posts
Showing posts with label Microeconomics. Show all posts

Tuesday, December 26, 2017

3-Month Bills Turmoil Ahead Of March Debt Ceiling Showdown: Bid To Cover Plunges To 8 Year Lows

Despite the GOP"s tax reform victory, over the past few weeks, Congress once again punted on a formal decision how to keep government funded and what to do with America"s debt ceiling and as a result US legislators simply kicked the can on the agreement of raising the nation’s borrowing limit for another few months. However, with the Treasury expected to breach the ceiling as soon as late March, today"s $45 billion 3-Month Bill auction was closely watched as it serves as a fresh gauge of investor anxiety about the ongoing impasse.


As a reminder, in the first week of December, the Treasury deployed a series of extraordinary measures to stay under the debt ceiling cap since it was reinstated on December 8. But T-bill investors, in both the primary and secondary market,  remain especially wary given questions over what’s known as the debt ceiling’s drop-dead date. Today"s Bills mature March 29, within the Congressional Budget Office’s late-March to early-April window for when Treasury will exhaust the extra capacity it’s using to keep below the $20.5 trillion limit.


Quoted by Bloomberg, Justin Mandeville of Inveso said that the late-December bill auctions “speak volumes to investors being cautious as to when the potential drop-dead date will be,” adding that “we saw it back in July when we had concerns about the October bills.”


And sure enough, having just concluded, the 3M bill was especially ugly, pricing at 1.445%, or a 3bps tail to the 1.415% When Issued, with Indirect Buyers fleeing, and taking down just 20.1% of the finally allotment, down from 30.8% in the last 6 auctions, while Primary Dealers had no choice but to step up aggressively from 61.9% in the 6MMA, to 74% as Direct interest also fizzled from 7.3% in the last 6 auctions to just 5.9%. But nowhere was the revulsion quite so visible as in the bid to cover, which plunged from 3.04 in the past 6 auctions to just 2.71 on Dec. 26: this was the lowest Bid to Cover since January 2009.



As Bloomberg reminds us, at the government’s July 24 auction, the US Treasury sold $39 billion of three-month bills at 1.18 percent, then the highest rate since 2008. The bid to cover for that particular sale also matched the lowest for the maturity since 2009. Congress wound up passing a three-month debt-ceiling suspension Sept. 8, weeks before Treasury Secretary Steven Mnuchin estimated the government would run out of cash.


However, revulsion to paper that could be impacted by the debt ceiling was not just in the primary market: it also hit the secondary Bill market, as the previously noted kink that has emerged in the bill curve between securities maturing in late March and those in early April, has gotten even more pronounced. For several days after the Dec. 18 auction of bills maturing March 22, the rate on these securities was higher than debt maturing a week later. Since then, the rate on securities expiring March 29 has climbed to 1.44%, exceeding those on bills due the following week by nearly 10 bps as shown in the chart below.



And so, looking at the debt ceiling fight that refuses to go away despite the can being kicked every few months, while there is still a chance the issue could be resolved without going down to the wire, it is unlikely: while lawmakers hammered out a spending bill this week to keep the government open through Jan. 19, they didn’t include a provision to lift or suspend the debt ceiling. The longer a resolution remains at the bottom of Congress’s to-do list, the larger the T-bill dislocations could grow. Sooner or later, the bond market - which has been crying wolf on a technical US default - will eventually be right.









Is Christmas Inefficient?

Authored by Jeffrey Tucker via The Mises Institute,


After hundreds of years of attacks on Christmas, economists have finally gotten into the act.



Yale University’s Joel Waldfogel, writing in the American Economic Review, condemns what he calls “The Deadweight Loss of Christmas.” Once you cut through the calculus and graphs, his conclusion is clear: though Christmas generates a $50 billion gift-giving industry, a tenth to a third of that is sheer loss. Why? Because the recipient doesn’t always get what he wants. Given the chance, the recipient would have purchased something else.


All of this follows directly from his underlying theory. In neoclassical economics, the consumer is best off when he chooses, within his means, the highest-rank good or service on his “utility” scale. If he can afford a steak, and he has to settle for a hot dog because the restaurant is out of t-bone, he experiences dead-weight loss. It’s even worse if he has to pay the price of steak and gets a wiener instead.


So it is with gifts. They generate a net loss, this theory says, unless the recipient would have otherwise purchased, with his own cash, precisely what he unwraps. Of course, this is rarely the case. To provide empirical meat to his theory, Professor Waldfogel interviewed students. The students received an average of $438 in gifts, for which these kids reported they would have paid only $313 if they had done the shopping themselves. The gap narrows when the gift is from a friend, and widens when it’s from the family.


Imagine Mr. Waldfogel attending your next Christmas gathering. Aunt Janie gives her nephews soap-on-a-rope, and they all praise her for her generosity and thoughtfulness. The economist then prods the youngsters to ‘fess up that soap-on-a-rope isn’t so great after all, and with the $9.95, they would have bought the newest Spice Girls tape. He declares the gathering a waste and encourages the party to break up in the interest of everyone’s economic welfare.


Professor Waldfogel proposes that we could eliminate these losses, which could be as high as $13 billion per year, by giving money instead of gifts, and letting the recipient spend it as he chooses. But then why not take matters one step further? What is the point of all this shuffling around of cash in the first place? According to neoclassical theory, it would be far better if everyone just clung to his own bank account and spent his own money as he saw fit. Indeed, we’d all be better off economically if Christmas were merely abolished—heck, maybe the Congress should do it—until such time as we all have perfect knowledge of each other’s preferences and are willing to act on them.


Far from being one man’s opinion, this thesis is becoming a classic “extra credit” question on microeconomics tests. Waldfogel is only distinguished for having formalized the model and tested it against his own students’ experience. The conclusion allows economists to presume they are smarter than the mass of the buying public, which persists in the irrational habit of buying things for each other instead of sending money or, even better, just spending it on themselves.


So, what’s wrong with the theory? Plenty. It equates personal utility with dollars spent, the classic conflation of value and price. In fact, a gift is a special kind of good with its own value. For example, we value the soap from the Aunt precisely because of its tie-in with familial affection. Even if the recipient would never have bought it, his personal utility is enhanced by the knowledge that his extended family is thinking about him and cares enough to give.


The source matters. If soap were given by a classmate who complains that you are odoriferously challenged, the “gift” is an insult in disguise. It has negative value. “Rich gifts wax poor when the givers prove unkind,” writes Shakespeare, who seemed to have a more complete view of economics than Professor Waldfogel. Neither is the person who receives a gift purchased under duress likely to be grateful. People on long-term welfare, for example, tend to think of taxpayers as suckers.


A comment later published in the same journal picked up on this. The authors (one from Harvard, one from the University of Miami) also did an empirical test. They used a different method (asking students about prices of specific gifts, not whole bundles), a larger sample of students (209 instead of 78), and asked more detailed questions. The results were the opposite of Waldfogel’s. The authors showed that more than half valued the gift above its retail price, suggesting that Christmas giving actually represents a gain in social welfare.


Moreover, these authors found that gifts asked for were less valued than gifts that were not. This fits with experience: we’re pleased to get what we want, but especially appreciative when we like something we had not expected. Indeed, good gift shoppers think about this ahead of time. They buy someone a tie he would never buy for himself. They buy items the receiver might be too modest or frugal to purchase himself, even if he had the resources.


Some items are just gifts and nothing more: fancy soaps, paisley boxer shorts, blankets with school logos, coffee cups printed with witty slogans, and the like. That’s why there can be such things as “gift shops” as distinguished from regular stores. Gifts have a different value because they are altogether different goods. They embody not only themselves but also their meaning. Imagine if someone came to dinner, and instead of bringing a bottle of wine, gave you $15 and told you to spend it on anything you wanted. It’s just not the same.


For his part, Waldfogel responds by accusing the authors of biasing their results. The very nature of their survey questions encouraged students to report “sentimental value” instead of pure “material value.” Going back to the drawing board, and correcting for this and other supposed errors, Waldfogel surveyed another group of students—455 this time—and still found a dead-weight loss, less than before, but a substantial one nonetheless. Christmas is inefficient: that’s his story and he’s sticking to it.


Of course there is no way to decouple one kind of value from another kind of value, since all economic value is ultimately subjective. Surveys can’t reveal what people value; only action in the marketplace does that. What’s deeply odd about this wrangling is that everyone seems to agree that only the value to the recipient should matter. That leaves out the really crucial point of gift giving: that it benefits the giver as well as the receiver.


People feel good in being generous, especially towards family and friends. Giving is an act of charity and liberality, virtues people practice because they’re good for the soul. And even if they aren’t, economists should follow the rule of “demonstrated preference”: if a person gives a gift, it is because he preferred giving the gift to keeping his own money. The action is “utility enhancing” on its own terms. Why? Because it, as opposed to something else, took place. Value is revealed in the preferences people demonstrate voluntarily. A well-chosen gift also reveals something about ourselves: we care enough to make our affections known in a personal way.


Again, the problem of the welfare state presents itself. In its form of “charity,” people do not give voluntarily. So resistant are people to dumping billions of dollars on millions of freeloaders, that the government has to threaten them with fines and jail terms (that’s what taxation is) to get them to fork over this “gift.” No one demonstrates a preference for the welfare state (voting doesn’t count since people are not using their own resources to purchase the services for which they vote). This degree of redistribution has to be imposed. Taxation, in contrast to Christmas, is a clear example of a utility-reducing activity.


But economists of the neoclassical school have rarely bothered with such distinctions. Their theories leave little room for reflection on property rights, individual choice, and the distinction between market exchange and forced redistribution. For them, a mathematically determined standard of efficiency is the only test that matters. Not even an absurd conclusion—for instance, that giving gifts is inefficient—causes them to rethink their core theory.


Economists are hardly alone in this. Skeptics and opponents of the market economy have long had a beef with the idea of giving and charity, especially as it occurs at Christmas.


Perhaps the socialists have long understood something about Christmas that others, even advocates of the market, have overlooked. In the institution of the gift, we find a strong rationale for the establishment and protection of private property and the capitalist economy. In order to give, we must first produce, acquire, own.


G.K. Chesterton, a great defender of Christmas against English Puritans who regarded it as corrupt and pagan, observed that collective ownership would mean the end of voluntary giving. Moreover, he clarified, “giving is not the same as sharing: giving is the opposite of sharing. Sharing is based on the idea that there is no property, or at least no personal property. But giving a thing to another man is as much based on personal property as keeping it to yourself.”


And contrary to the complaints of materialism at Christmas, meaningful gifts can be as elaborate as gold, frankincense, and myrrh, or as humble as two fish and five loaves.


It’s no wonder, then, that history’s dreariest socialists have denounced Christmas. The economic core of its gift giving centers on private property, while its ethical core belies the claim that private property institutionalizes greed.


“There is the greatest pleasure in doing a kindness or service to friends or guests or companions,” wrote Aristotle in The Politics, “which can only be rendered when a man has private property. These advantages are lost by excessive unification of the state…. No one, when men have all things in common, will any longer set an example of liberality or do any liberal action; for liberality consists in the use which is made of property.”



As for intellectuals—economists no less—who have failed to understand this simple truth, it’s staggering to think of the dead-weight loss their ideas have imposed on society.









Monday, December 11, 2017

Stellar 3Y Auction: Highest Bid To Cover Since Sept 2015, Foreign Demand Surges

Unlike last month"s ugly 3Y auction, today"s just concluded sale of $24 billion in 3 year paper was stellar, stopping through the When Issued 1.934% by 0.2bps, a surge in buyside demand as the Bid to Cover jumped from 2.76 to 3.15, the highest since September 2015, while Indirect Bidders took down the most since August.


The details: the high yield was 1.932% vs six previous auction average 1.572%, it stopped through the WI of 1.394%.


The Bid-to- cover was 3.15, up from 2.76 in October, and well above the previous six auction average of 2.88.


Dealers were awarded 33.6%, slightly below the six previous auction average 35.2%, and down from 37.5% last month, while Direct bidders took down 7.4%, below last month"s 9.0%, and down from the six previous auction average 8.8%.  Finally, foreign central banks and reserve managers, i.e., Indirect bidders were awarded 59.0% vs the 6auction average 56.0%, and up from 53.5% last month. It was also the highest Inidrect award since August 2017.


Overall, a very solid auction and one which sets the stage for today"s second, benchmark bond auction of 10Y paper set for 1pm.










Monday, November 27, 2017

Tailing 2Y Auction Prices At Highest Yield Since September 2008 As Foreign Buyers Stay Away

With 2Y yields having jumped sharply in recent week, it was not surprising that today"s auction of $26 billion in 2Y paper would have a high yield, and sure enough, printing at a high yield 1.765%, the highest since September 2007, tailing the When Issued 1.763% by 0.2bps, and well above the six previous auction average of 1.410%. This was the third consecutive tailing 2Y auction.


The internals were hardly impressive, with the bid-to- cover of 2.725, lower than both last month"s 2.74 and also below the six previous auction average 2.91.  In fact, it was the lowest since January"s 2.682%, with total bids of $72.3bn for $27.4bn in notes sold vs six previous auction average of $78.0b in bids for $28.3b in notes sold.


Also not surprising perhaps is that foreign buyers were less than enthusiastic, with Indirect bidders awarded only 41.9% of the auction, down sharply from last month"s 48.2%, and below the 6 month moving average of 51.7%. It was also the lowest since December 2016. Dealers were awarded almost the same, or 41.2%, far higher than the six previous auction average 32.7%. Finally, direct bidders received 17% of the auction, roughly in line with the 17% average of the prior 6 auctions.


Overall, the auction confirms that investor interest for the short-end of the curve is waning, and suggests that more rate hikes by the Fed are coming, which in turn will push the 2Y yield even higher, further steepening the yield curve in the coming days.










Thursday, October 26, 2017

Einstein"s Scribbled Theory On Happiness Sells For $1.6 Million – 195x Highest Expectations

A scribbled note by Albert Einstein which described his theory on the key to happy living was sold at auction in Jerusalem for $1.56m.



According to The Telegraph, the winning bid for the note far exceeded the pre-auction estimate of between $5,000 and $8,000, according to the website of Winner"s auction house.


"It was an all-time record for an auction of a document in Israel," Winner"s spokesman Meni Chadad told AFP…Bidding in person, online and by phone, started at $2,000. A flurry of offers pushed the price rapidly up for about 20 minutes until the final two potential buyers bid against each other by phone. Applause broke out in the room when the sale was announced.


The newspaper reports that Einstein was on a lecture tour of Japan in 1922 and had recently been awarded the Nobel prize. Einstein didn’t have cash to pay a tip to a bellboy in the Imperial Hotel in Tokyo, so he gave him two notes, predicting they would be worth more than a tip. He is reported have said.


“Maybe if you"re lucky those notes will become much more valuable than just a regular tip.”



The Telegraph continues, Einstein dedicated his life to science, but suggested in the notes that fulfilling a long-term ambition doesn"t necessarily guarantee happiness. 


The note said.


“A quiet and modest life brings more joy than a pursuit of success bound with constant unrest.”



The anonymous buyer was from Europe.


The notes were sold by an anonymous Hamburg resident who commented "I am really happy that there are people out there who are still interested in science and history and timeless deliveries in a world which is developing so fast."


On the second note was written “where there’s a will, there’s a way”. It sold for $240,000.


 









Thursday, October 12, 2017

Curve Flattens After Blistering 30Y Auction Stops Through, Highest Bid To Cover In Two Years

After yesterday"s stellar 10Y auction, today at 1pm the Treasury sold the last of three weekly auctions, by offering $12 billion in 30Y paper to eager buyers. And eager they were, with the high yield of 2.870% stopping through the When Issued 2.874% by 0.4 bps. This was the biggest strop through on a 30Y auction going back to October 2016.


It wasn"t just the stop out that was strong, but the Bid to Cover as well, which at 2.530 was the highest going all the way back to September 2015. The internals were similary impressive, with Indirects taking down 62.8%, up from 58.8% in September, and on top of the 6 month average of 62.4%. Directs ended up with 10.6%, the highest award since March, higher than the 6.1% average, while Dealers were left holding 26.6% of the auction, the lowest dealer takedown since March, suggesting once again that even a modest increase in yields and foreign duration seekers crawl out of the woorwork and buy any US paper they can find.


Overall, while not a strong as yesterday"s 10Y auction, there were blistering demand for today"s last weekly auction, which was observed earlier courtesy of the 5s30s which has been flattening all day, sending the yield curve to the flattest in years.


Wednesday, October 11, 2017

Soaring Foreign Demand For Strong, Stopping Through 10Y Auction

Just 90 minutes after today"s strong 3Y auction, moments ago the Treasury sold $20 billion in a 10Y reopening of Cusip 2R0, which saw nothing short of blistering demand at both the close and through the internals. The high yield of 2.346% stopped through the When Issued by 0.2bps, or 2.348%, the first non-tailing 10Y auction since March 2017. This was also the highest yield for 10Y paper since the May 2017 auction.


But while the break in tailing auctions was notable, the internals were even more impressive: the bid to cover of 2.54 soared from last auction"s 2.28, and was above the 2.39 six auction average. Direct Bidders were awarded 6% of the auction, same as September, and right on top of the 6M moving average, however it was the Indirects where the firework were, as foreign buyers took down a whopping 69.1%, which was not only 14% higher than September, but was the highest since January"s 70.5%, and just shy of all time highs. Dealers were left holding just 24.9% of the 10Y auction, the lowest since March.


Overall, a very solid effort, one which confirms that no matter what happens to the macro picture, foreigns will jump at the first opportunity to bid up US 10Y paper when it approaches the recent resistance of 2.40%.


Thursday, September 28, 2017

"Tremendous" Demand For 7Y Treasurys; Second Largest Buyside On Record

An ugly 2Y auction (with the highest yield since 2008) on Tuesday, a mediocre 5Y auction yesterday, and now a blistering 7Y auction, in which the Treasury sold $28 billion in "curve belly" notes at a high yield of 2.13%, stopping through the When Issued by a surprisingly strong 1.1bps, the highest since April.


As Stone McCarthy described the auction in one word, "Tremendous", noting it a buyside takedown which was the second largest on record.


The internals were impressive: the bid to cover of 2.70 surged from last month"s 2.46, was solidly above the 2.55 six month average, and was the highest since April. It was also the third highest in the past 5 years. Indirect bidders couldn"t get enough, and were awarded 70.6% of the takedown, their highest allotment since April, and above the 69.3% 6MMA. Likewise, Directs waved it in, and took down 19.0%, the highest since December 2016, leaving Dealers holding only 10.4%, the second lowest award for the class on record, higher only than the 8.8% this past April. 


In short, a very strong auction, whether or not driven by China as SocGen speculated earlier, and one which not only pushed the curve lower, but also sent the USDJPY to session lows, validating one of the strongest correlations we have observed in recent months.


Tuesday, September 12, 2017

Ugly, Tailing 10Y Auction: Lowest Indirects Since 2016

If yesterday"s 3Y auction was ugly, today"s $20 billion 9-year-11 month reopening was just as abysmal.


With a high yield of 2.18%, this was not only a whopping 1.1bp tail to the 2.169% When Issued, it was the 6th consecutive "tail" in a row, with just 2 10Y auction stopping through so far in 2017 (January and March). That said, the yield was also the lowest since November, which may explain some of the weak bidside interest.


The internals were ugly, with a Bid to Cover of 2.28, fractionally above August"s 2.23, but well below the 6 month average. Just like yesterday, foreign bidders balked, and the Indirect award was a paltry 55.3%, down from 57.9% last month, and below the 63.4% average. This was the lowest Indirect award since November 2016. With Directs once again in line, at 6.0%, just below the 6.8% last month, it was the Dealers who had to step up and they do, taking 38.7% of the final allottment, the highest since November, and well above the 29.3 6 month average.


Finally, what likely prevented today"s auction from printing notably better, is that the recent record specials in repo, which last week hit a sub-fails rate of -3.75%, was completely gone as of this morning, and the 10Y traded at 0.00% in repo at 8am on Tuesday. And with no shorts to squeeze, the result was as expected.


Monday, September 11, 2017

Ugly, Tailing 3Y Auction: Bid to Cover Tumbles, Lowest Indirects Since 2016

Whether due to the broader risk-on move, or as a result of a surge in inflation fears in the aftermath of Hurricanes Irmas and Harvey, today"s auction of $24 billion in 3Y paper was arguably the ugliest yet in 2017.


Printing at a high yield of 1.4330%, while this was the lowest yield since February, it was also a 0.6 bps tail to the 1.427% When Issued. The internals were even uglier, with the Bid to Cover tumbling from 3.13 to 2.70, and below the 6 month average of 2.85. Just as notable was the plunge in the Indirect award, which slumped from 64.1% in August to just 46.2% in August, the lowest since December 2016. And while Directs were largely unchanged from last month, at 10.4%, above the 8.7% 6M average, the Dealer award soared from 25.8% to 43.4%, nearly eclipsing the Inidrect take down, well above the 6 month average of 35.6%, and the highest since December 2016.



Overall, an unexpectedly ugly auction in light of last week"s plunge in bond yields, although perhaps not all that surprising in light of the broad elimination, if only for the time being, of both geopolitical and climate-linked risk. And now, we look forward to the upcoming 10Y auction which may be just as ugly, if not worse should today"s risk on euphoria persist, despite 10Y paper still trading quite special in repo as of this morning.

Thursday, September 7, 2017

WTI/RBOB Drop After Harvey Prompts US Crude Production Collapse, Biggest Inventory Build In 6 Months

Last night"s first glimpse of Harvey"s impact on energy confirmed a sizable crude build but only modest gasoline draw. WTI/RBOB prices slid into the DOE print and extended losses (after a quick kneejerk higher) following a bigger than expected crude build (+4.58mm vs +4mm exp). Gasoline and Distilates saw bigger draws than API reported but it was the collapse in Lower 48 crude production that stood out with most of Texas offline.



API


  • Crude +2.79mm (+4mm exp) - biggest build in 5 months

  • Cushing +669k (+1mm exp)

  • Gasoline -2.544mm (-5.2mm exp) - biggest draw in 6 weeks

  • Distillates -610k

DOE


  • Crude +4.58mm (+4mm exp) - biggest build in 5 months

  • Cushing +797k (+1mm exp)- biggest build in 5 months

  • Gasoline -3.20mm (-5.2mm exp)- biggest draw in 2 months

  • Distillates -1.396mm

The inventory changes reported by the API were much smaller than those forecast by analysts. As a reminder, Saxo Bank"s Ole Hanson notes that "inventory data later is a lot of moving parts which could be quite skewed away from what we’ve seen in recent weeks." Additionally, investors “are going to be skeptical of the data,” James Williams, an economist at energy researcher WTRG Economics, told Bloomberg. “It might be pretty flaky data this week and next, so I don’t expect to see a big market-mover”


Bloomberg"s Fernando Valle notes energy"s past week was all about Hurricane Harvey as refineries shuttered, choking output and hauling down inventories of gasoline and distillates.


Bigger than expected crude build and bigger gasoline and distillate draws than API reported...



Bloomberg"s Fernando Valle points out that the increase in crude inventories was largely expected after the devastating impacts of Hurricane Harvey on the Gulf Coast. The draw on refined product inventories was weaker than expected, as lost demand -- both locally and abroad -- offset lower-than-expected refinery utilization. Investors" focus will now shift to the restart of refineries and export ports.


As one might expect, Gulf Coast imports fell to a record low.



Bloomberg"s David Marino notes that exports tumbled with Texas ports closed.



Crude was the lowest since 2014, before the export limits were lifted. Gasoline fell by more than half to 319,000 barrels a day, the least in four years, and distillate shipments were the lowest since 2011. Look for those numbers to rebound as ports and pipelines reopen fully.


Production declined in the previous week, and with most of Texas ofline last week - Crude production in the Lower 48 collapsed...



This is the biggest week-on-week fall since August 2012, when Hurricane Isaac shut in more than 1.3 million barrels a day of Gulf of Mexico production.


WTI and RBOB have drifted lower after last night"s API data, heading into the DOE data. The kneejerk reaction to the crude build, gas draw and production crash was higher prices...




But that did not last long...



Brent “reached the May high and so far it’s been firmly rejected,” says Ole Hansen, head of commodity strategy at Saxo Bank. “It’s quite significant if we are getting a decent rejection here as it could indicate a short-term top in the market”


“It’s a market that is starting to struggle to move much higher, Brent crude up to $55 is probably as good as it gets at this stage”: Hansen

Tuesday, September 5, 2017

Debt Ceiling Turmoil: 4Wk Bills Price At Highest Yield Since Sept 2008 On Technical Default Fears

While traditionally few care about T-Bill auction results, which are usually a rather subdued affair, today was different: with today"s $20 billion in 4-Week Bills maturing on October 5, or smack in the middle of the interval when the US is expected to run out of cash absent a debt ceiling deal, there was palpable turmoil in the Bills market, as the yield on the just concluded auction demonstrated.



With the When Issued trading at 1.23%, the just priced auction printed at a high yield of 1.30%, what appears to be a record tail of7 bps, and the highest yield since September 2008. It is also an indication that for all the talk of a reduction in government shutdown/debt ceiling crisis odds, the market will have none of it, as the ongoing "king" in the October bills demonstrates.


The internals were mostly remarkable for the soaring yields, with other components coming roughly in line.:


  • High yield 1.300% vs prior six auction average 0.966%

  • Bid-to- cover 3.04 vs prior six auction average 3.07

  • Dealers awarded 58.5% vs previous six auction average 64.7%

  • Direct bidders awarded 16.9% vs prior six auction average 8.6%

  • Indirect bidders awarded 24.6% vs prior six auction average 26.6%

Putting the latest T-Bill "Kink" in perspective, the chart below shows just how high the Sept-Oct "hump" has blown out to following the auction.


Monday, August 28, 2017

Primary Dealer Bid Surges In Poor 2Y Auction

While the high yield of the just priced 2Y auction came "on the screws" at 1.345%, below last month"s 1.401%, but above the six previous auction average of 1.305%. and exactly where the When Issued suggested today"s auction of $26 billion in 2Y notes would price, the internals were decidedly weaker than the stop out would suggest.


The bid-to- cover of 2.86 was a notable decline from last month"s 3.06%, as well as below the 6 month average of 2.90%. It was also the lowest since April.


However, the most surprising aspect of today"s auction was the surprising surge in Dealers take down which surged to 41.6%, up from 24.6% in July, the highest since January, and well above the six auction average of 29.3%. And since the direct bidder award of 12.6% was below both July"s 16.9% award and the six previous auction average 15.0%, it meant foreign buyers, aka Indirect bidders, were awarded only 45.8%, a sharp drop from last month"s 58.5%, and below the six previous auction average 55.7%.


Quoted by Bloomberg, FTN strategist Jim Vogel said that metrics fell short of historical benchmarks due to the “odd timing of the sale and general lack of change in short UST since the end of July.”  Bloomberg also notes that the auction was expected to struggle because of U.K. holiday, summer vacations and its position 90 minutes before 5Y issue.


Overall, a rather weak auction which was saved by the jump in Dealer awards, perhaps reflecting growing debt ceiling fears ahead of the X-Date some time in late September, early October.


Lowest Dealer Award On Record In Blistering 5Y Auction

The poor 2Y Auction that concluded just 90 minuets ago is a distant memory, because while the market, and especially Indirect bidders, appeared to balk sale of $26 billion in 2 Year paper, there appeared to be no concerns involving the just concluded sale of $34 billion in 5Y new paper, buyside demand for which could be described as "blistering."


The high yield of 1.742% stopped through the 1.75% When Issued by 0.8bps, with an 18.98% allocation at the high yield. It was the lowest 5Y yield going back to October of last year.


The internals were even more impressive: while the Bid to Cover was unchanged from last month at 2.58, and above the 6 month average of 2.43, the Indirect takedown was just shy of a record at 69.1% (vs 64.7% for the past 6 auction average), and only the jump in the Direct Bid award from 6.2% in July to 13.5%, the highest since July 2014, prevented Indirects from getting an all time high allotment. At the same time, the Dealer award dropped from an already low 24.1% in July to just 17.5%, the lowest in 5Y auction history.


In summary: an odd day in which in the span of 90 minutes we saw one poor and one stellar auction, for reasons that are not exactly clear.


Thursday, August 17, 2017

The Single Biggest Bullish Catalyst For Oil

Authored by Nick Cunningham via OilPrice.com,


One of the key objectives for OPEC is to bring down inventories, a goal that has been elusive this year. But if the oil futures curve is anything to go by, the oil market is showing signs of tightening.



Brent futures have recently begun to exhibit a state of backwardation, which is when near-term oil futures trade at a premium to contracts dated further off into the future. This is the first time in years that backwardation has occurred, and most analysts are taking it as a sign that the oil market finally could be getting closer to rebalancing. In the past, backwardations have accompanied a rebound in the oil market after a bust, while a contango (the opposite of backwardation) tends to occur when the market crashes because of a supply glut.


There are several reasons why backwardation is bullish, which has been discussed in previous articles. A declining futures curve makes it uneconomical to store oil, so backwardation could accelerate the drawdown in inventories. It also complicates the hedging strategies of shale producers, which could hold back expansion plans. It also is a symptom of tightening near-term supplies, although, to be sure, the flip side of that argument is that it could merely be a reflection of expectations that the supply glut will reemerge at some point in the future.    


Still, backwardation is occurring at a time when there are other bullish indicators starting to crop up. The U.S. has seen a sharp drawdown in inventories in recent months, down more than 60 million barrels since March. The IEA and OPEC both recently upgraded their oil demand estimates. "World economic growth has gained momentum," OPEC said. "With the ongoing growth momentum and an expected continued dynamic in second-half 2017, there is still some room to the upside."


The view of Wall Street is also becoming more bullish. Hedge funds and other money managers have amassed a large number of long positions on recent weeks. For the week ending on August 8, investors stepped up their bullish bets on Brent by the equivalent of 58 million barrels, according to the FT, which was the largest weekly increase towards net length since December.





“It’s hard to be aggressively negative if every week you’re getting stronger numbers,” Paul Horsnell, global head of commodities research at Standard Chartered, told the FT, although he added that “there is still resistance. The market is not willing to push prices too far up.”



Indeed, there is little prospect of oil prices moving much beyond $50 per barrel. Not everyone is even sold on the notion that the market is tightening. OPEC production is at its highest point so far in 2017, U.S. shale continues to rise, and some long-planned projects are coming online later this year in Canada and Brazil, for example. “There is no way this oil can be accommodated into the market so prices are going to have to give at some point,” Mr Dei-Michei of JBC Energy told the FT. “This bullish sentiment cannot last.”


In fact, swings in sentiment, like a pendulum, are typical. More than once this year, the bullish positions have built up too far, only to be undone when sentiment shifted, causing a steep selloff in oil prices. Following the price crash in June, the profoundly bearish positioning amongst hedge funds and other money managers also went too far, causing shorts to be liquidated and bullish bets to remerge – which, again, accompanied a rebound in prices.


All of that is to say that the most recent shift towards long bets on oil futures probably can’t carry oil prices all that far. The underlying fundamentals simply don’t justify significant price gains…at least for now. “They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said on Bloomberg TV, referring to the OPEC cuts. “Re-balancing is a stubborn process.”


In short, the shift into backwardation in the futures market suggests that the supply balance is heading in the right direction, and it probably puts a floor beneath prices for the time being. But it doesn’t necessarily mean that oil be heading much higher than $50 per barrel anytime soon.

Monday, July 31, 2017

No Fireworks In Today's Bill Auction: Has The Debt Ceiling Crisis Passed?

Unlike last Monday"s 3M T-Bill auction, which as a reminder priced at the highest yield since the fall of October, but more importantly showed a dramatic "kink" in the 3M-6M bill yield due to growing concerns of a disorderly debt ceiling debate and potential government shutdown...



... moments ago the Treasury auctioned off $39BN in 3M and $33BN in 6M paper, which came off without a hitch - with the 3M stopping through the 1.08% When Issued, pricing at 1.07%, and more importantly, the 6M-3M bill spread has now normalized.



Also of note, last week"s plunging Bid to Cover for the 3M auction which showed widespread buyside concern when bidding for the paper, rebounded sharply and rose from last Monday"s 2.87 to 3.18, while the 6M BTC rebounded from 2.91 to 3.08.


Some more details from Stone McCarthy:


  • The 3-month bill auction stopped at 1.070%, with an 84.46% allocation at the high yield. The 3-month auction bid/cover ratio was 3.18. The average 3-month bid/cover over the past three months was 3.14. The WI was last trading at 1.080% at 11:30 AM. Indirect bidders took down 43.20% of the 3-month bill auction and Direct bidders took down 11.94%.

  • The 6-month bill auction stopped at 1.130%, with a 12.00% allocation at the high yield. The 6-month auction bid/cover ratio was 3.08. The average 6-month bid/cover over the past three months was 3.27. The WI was last trading at 1.120% at 11:30AM. Indirect bidders took down 47.96% of the 6-month bill auction and Direct bidders took down 3.44%.

So are debt ceiling concerns now in the rearview mirror? Perhaps not: one possible explanation is that with today"s quarter end, major financial institutions simply had no choice and had to park cash in any available security, even if it is the "dreaded" 3-Month T-Bill.


Another explanation is that the further we drift from the D-Day, the greater the hope that the fiscal situation will be normalized, leading to stable demand for Bills. On Friday, Treasury Secretary Steve Mnuchin informed Congress that action would be needed on the debt ceiling by September 29th.


"Based upon our available information, I believe that it is critical that Congress act to increase the nation"s borrowing authority by September 29, 2017. I urge Congress to act promptly on this important matter," Mnuchin wrote in a letter addressed to Speaker Paul Ryan.


This means that with one month before the US "D-Day" and the Bill maturity day, bond traders may simply be assuming that this will be enough time to get the US house back in order.


As we will show in a follow up post, this may prove to be an aggressive assumption. For now, however, stability has returned to the Bill market, and the Treasury market - if only for now - is giving the "all clear" on the upcoming debt ciling and government shutdown discussions.

Tuesday, July 25, 2017

Ahead Of The Fed: Strongest Demand For 2Y Paper Since 2015; Lowest Dealer Award On Record

With the FOMC members currently huddling deep inside the bowels of the Marriner Eccles building, perhaps scheming how to spook markets by announcing a surprise rate hike tomorrow, one would have assumed demand for 2 Year paper in today"s auction would be less than stellar. One would be wrong, because moments ago the Treasury sold $26bn in 2 year paper to what was clearly an overabundance of demand: the high yield of 1.395% stopped through the When Issued 1.401% by 0.6 bps, and was the highest yield going back to October 2008.


The bid-to-cover rose to 3.06 from 3.03 in June, and was above the six previous auction average of 2.84. It was also the highest Bid to Cover since November 2015.


The internals were also rather impressive, with Indirects taking down 58.5%, above the 56.6% in June, and above the 6MMA of 54.1%. Directs were awarded 16.9%, down slightly from 18.4% last month and above the 6 month average of 13.7%. Combined these two meant record buyside interest, leaving Dealers with just 24.6% of the auction, down from 25.0% and below the 32.1% 6month average. This was the lowest Dealer award on record.


In other words, if anyone was worried about a surprise announcement by the Fed tomorrow, one which would send 2Y yields spiking, it wasn"t to be found among the bidders for today"s auction.


Monday, July 24, 2017

3-Month Treasury-Bill Auction Prices At Highest Yield Since Lehman On Debt-Ceiling Concerns

It seems Morgan Stanley was right when they said "the debt ceiling worries us most," as today"s 3-month T-Bill auction surprised the market with its highest yield since the fall of 2008, as investors continue to price concerns that the U.S. government will exhaust its borrowing authority around mid-October.



As SMRA details:





The 3-month bill auction stopped at 1.180%, with a 67.70% allocation at the high yield. The 3-month auction bid/cover ratio was 2.87. The average 3-month bid/cover over the past three months was 3.13. The WI was last trading at 1.165% at 11:30 AM. Indirect bidders took down 38.44% of the 3-month bill auction and Direct bidders took down 5.61%.



The 6-month bill auction stopped at 1.130%, with a 34.87% allocation at the high yield. The 6-month auction bid/cover ratio was 2.91. The average 6-month bid/cover over the past three months was 3.30. The WI was last trading at 1.115% at 11:30AM. Indirect bidders took down 40.66% of the 6-month bill auction and Direct bidders took down 2.69%.



So the 3-month bill is priced 5bps cheaper than the 6-month bill and both dramatically tailed.


As BofA noted, the early pricing of debt limit concerns may reflect overhang from this week’s bill auctions and the "greater influence" of government money market funds following October"s reforms.


But, Morgan Stanley recently warned that the biggest immediate risk to the market is:





The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks. But on the other issues, we’re more relaxed. The Senate’s Healthcare bill had an approval rating of 17%, so we doubt its failure would be a hit to consumer confidence. The Special Counsel’s investigation, whatever the outcome, will likely take considerable time. Our economic baseline was already cautious with regard to fiscal stimulus, a long-held view of our policy team. And while tax cuts could boost the market temporarily, they could also lead to a more hawkish Fed, a classic ‘be careful what you wish for.’



As the 3mo6mo yield curve inverts dramatically...




Inflecting right around the mid-October date of today"s auction...


Monday, June 26, 2017

Blistering Demand For Short End As 2Y Auction Stops Through; Bid To Cover Jumps

With the Fed continuing to hike rates, it should come as no surprise that today"s 2Y auction printed at a high yield of 1.348%, the highest stop out since October 2008. And perhaps because the yield was so high, it invited significant buyside demand, mostly from foreign central banks, with the auction stopping through the When Issued of 1.354% by 0.6 bps, the same as last month, and demonstrating surprising demand for the short end of the curve.


Confirming the strong demand was the jump in the Bid to Cover from 2.904 in May to 3.031%, the highest since November 2015, as a result of $82.0bn in total bids for $29.2bn in notes sold vs six previous auction average of $74.2b in bids for $29.1b in notes sold.


Additionally the internals were just as strong, with the Indirect Bid of 56.62% well above the 6 month average of 50.2% if slightly less than last month"s 57.15%. However, with the surge in Direct Bids to 18.35%, it meant the Primary Dealer takedown of 25.04% was the second lowest on record.


Overall, this was a very strong auction, one which continued to foil the traditional narrative that in a time of rising rates demand for the short end should see some weakness, although one possible explanation comes from Bloomberg which notes that the auction was expected to benefit from short-covering demand and carry.