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.

Chinese Home Prices Surge Most On Record, Ignore "Cooling" Measures

Over the past month, one of the key Chinese economic themes has been Beijing"s tepid, if growing, desire to gradually deflate the country"s unprecedented housing bubble. Alas, according to the latest, September data, the government has so far failed to tame the epic homebuying frenzy it unleashed just over a year ago courtesy of a record debt and fiscal stimulus flood, when it in turn scrambled to offset the popping of the 2013 housing bubble (as a reminder, China"s economy is best described as a serial or parallel shift from one asset bubble to another).

According to China"s National Bureau of Statistics, average new-home prices in the 70 cities tracked surged by 1.8% in September from the month prior. On an annual basis, housing prices soared 11.2% year over year, after a 9.2% jump in August. This was the biggest annual jump on record, and the 12th consecutive month in year-over-year gains.

Still, despite the obvious failure to cool the market, the NBS noted in its statement that the market “apparently cooled” in response to targeted measures rolled out in some cities. If a record jump in prices is considered "cooling", we"d be curious to know what China considers a "overheating."

The latest home price increase record takes place even as local governments in at least 21 cities introduced property curbs as reported previously, such as requiring larger down-payments and limiting purchases of multiple dwellings, in a bid to arrest runaway prices. Even with some main markets cooling though, policy makers have a long way to go before they can claim victory in averting a bubble without killing one of the economy’s main pillars of growth.

Some more details from Goldman, which reports that using its own population-weighing seasonal adjustments, the primary market increased 2.1% month-over-month in September, higher than the growth rate in August. Out of 70 cities monitored by China’s National Bureau of Statistics (NBS), 66 saw housing prices increase in September from the previous month (68 in August, on a seasonally adjusted basis).

On a year-over-year, population-weighted basis, housing prices in the 70 cities were up 11.7% (vs. 9.7% yoy in August).

House price inflation decelerated in tier-1 cities (Shanghai) but accelerated in the others in September: In tier-1 cities, September price growth was 3.3% month-over-month after seasonal adjustment, coming off the peak of 3.5% in August. (Total property sales in tier-1 cities accounted for around 5% of nationwide property sales in volume terms.) In tier-2, 3 and 4 cities, house price inflation accelerated 0.8pp, 0.5pp and 0.3pp respectively in September, compared with August.

Still, as Bloomberg noted, it was the first time the statistics bureau had released figures for the current month, which suggests that moves to clamp down on the property frenzy may have had the unintended effect of stoking an already red-hot market by prompting a rush of buying before further restrictions were imposed. Prices in Beijing jumped a record 4.9 percent in September, Friday’s data showed. The local government Sept. 30 increased down payments for first-time buyers to 35 percent, the highest among the nation’s biggest cities. In Shanghai, prices rose 3.2 percent in September.

That said, the NBS unexpectedly pointed out that new-home prices in Beijing fell 3.7 percent in the first weeks of October from September and dropped 2.5 percent in Shanghai. It is unclear if this marks a shift in the long-term trend or just a brief hiccup.

“These curbs only aim to rein in the home-buying panic and to stem the bubble, instead of being an all-round shackling on the property market,” Wang Tao, chief China economist at UBS Group AG in Hong Kong, said before the data was released. “The possibility of a home-price plunge is low.”

And as one can see by looking at the above charts, the curbs introduced so far are likely to have only a mild impact, she said. “The purchase restrictions currently imposed can still be bypassed.”

It wasn"t just soaring prices: the pace of home sales is also rising sharply. The value of new homes sold rose 61% in September from a year earlier, almost double the previous month’s gain. A buoyant property industry helped the world’s second-biggest economy grow 6.7% in the third quarter from a year earlier, exactly as consensus had "expected."

For now, it is safe to say that the recent "curbs" have failed: an Oct. 1 report by SouFun Holdings Ltd., the owner of China’s biggest property website, showed prices in September gained in 81 of 100 cities tracked, up from 68 in August. Average new-home prices climbed 2.8 percent, accelerating from a 2.2 percent gain the previous month, the private data provider said.

To be sure, if China did want to really burst the property bubble, it could: as UBS" Wang Tao said, "the most powerful property control is credit tightening, which we haven’t seen." Why? Because if we did see it, China would have to worry not so much about its housing bubble, as its credit growth and debt bubble, which as we showed last week, is the last pillar holding up not just the Chinese, but the global economy too.