The US congressional committee responsible for striking a deficit reduction deal ended its work without an agreement on Monday, delaying any solution to America’s debt problems and setting the stage for a sharp clash over budgetary policy ahead of the 2012 elections, the FT reports. The announcement by Representative Jeb Hensarling and Senator Patty Murray, the Republican and Democratic co-chairs of the panel, came just after the close of trading on US financial markets on Monday, prompting a wave of disappointed reactions from across the political spectrum and business. The failure of the committee also stoked fresh concerns that political gridlock could diminish the prospects for passage of economic stimulus measures to prop up the world’s largest economy in 2012, and threaten a partial government shutdown as early as next month. Mr Hensarling and Ms Murray sought to strike a conciliatory note in their joint statement. “Despite our inability to bridge the committee’s significant differences, we end this process united in our belief that the nation’s fiscal crisis must be addressed and that we cannot leave it for the next generation to solve,” they said.
The US Treasury would accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, the FT says, citing a person familiar with the Treasury’s thinking. The effectiveness of ‘Operation Twist’ would depend on how the Treasury reacted. If it pushed the other way, and took advantage of the Fed’s buying to sell more long-dated debt, then it could minimise the effect on interest rates. However, the Treasury would be unlikely to respond to falling long-term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt.
Equity markets ended another volatile week with sentiment somewhat soured by worries over politicians’ and monetary guardians’ strategy for dealing with a weak global economy and the eurozone fiscal crisis, the FT reports. The FTSE All-World equity index was down 0.6 per cent following a 0.7 per cent drop for the Asia-Pacific region and as the FTSE Eurofirst 300 declined of 0.7 per cent. S&P 500 futures suggested Wall Street would open flat. Such caution and indecision could be seen across asset classes where mixed signals were being sent on the market’s attitude to risk. So, while the perceived haven of gold was higher, another bolt-hole, US Treasuries were slightly weaker, with benchmark yields up 2 basis points to 2.0 per cent. In commodities, copper was down 0.7 per cent to $4.10 a pound, but Brent crude was up 0.3 per cent to $114.94 a barrel. Currencies were little changed, though the risk aversion in equity markets was seeping into forex with the Aussie dollar paring gains, the US dollar index up 0.1 per cent and the euro down 0.1 per cent to $1.3864 after Thursday’s 1.5 per cent slide.
Treasuries have gone through the looking glass.
As we’ve discussed, it’s largely because market participants have become overly obsessed with holding safe-haven securities, demanding Treasuries and nothing else. Read more
Markets were cautiously positive, with traders apparently reluctant to chase the previous session’s rally with the same vigour ahead of a slew of headline risks, the FT’s markets overview reports. The FTSE All-World equity index was up just 0.03 per cent as Europe opened with a 0.2 per cent loss and after the Asia-Pacific region added 0.1 per cent. The commodity, forex and sovereign debt sectors were exhibiting greater wariness. Traditional havens such as the US 10-year note werestronger, nudging the yield down 2 basis points to 2.02 per cent, while the dollar index was up 0.2 per cent and the euro was down 0.1 per cent to $1.4077. Niggling concerns about global demand saw copper dip 0.2 per cent to $4.11 an pound, leaving Brent crude down 33 cents at $115.47. Meanwhile the gold bugs were “bargain” hunting, the precious metal rebounding 1.5 per cent after Wednesday’s 3 per cent dive. S&P 500 futures pointed to Wall Street’s benchmark index giving back 3 points of Wednesday’s 33-point, or 2.9 per cent, surge. The rally had come as investors felt the slump at the start of September – the S&P 500 fell 4.4 per cent in three sessions – had been overdone. Some slightly better macroeconomic data and an easing of tensions in the eurozone after the German constitutional court allowed Berlin to participate in the bloc’s various bail-outs, added juice to the bounce.
We’ve been harping on for a while now about how a scarcity of quality collateral in the market (read US Treasuries) has been wreaking havoc in the repo markets — and how QE-related large scale asset purchases have only added to the problem.
We’ve noted too that these factors require a major investor rethink when it comes to how funding markets operate, and also in how to interpret the Treasury yield curve. Read more
The yield on benchmark US Treasury 10-year notes approached the lowest level for six decades as bond traders grew increasingly confident that slumping equities and the eurozone debt crisis would compel the Federal Reserve to enact a new programme of bond purchases later this month, the FT reports. The yield on 10-year notes touched 1.91 per cent on Tuesday, just above the low of 1.9 per cent set in 1950 according to Barclays’ Equity Gilt study. Mounting concerns about the outlook for the US economy, particularly on the jobs front, have heightened expectations that the central bank will sell short-term Treasuries, or allow them to mature, and use the proceeds to buy long-term paper – a policy dubbed “Operation Twist” as it narrows the difference between short- and long- dated yields. Strategists and traders have for some weeks debated the merits of the Fed implementing a version of the original Operation Twist, which was tried back in the 1960s during the Kennedy administration. The 10-year Treasury yield determines US mortgage and corporate borrowing rates and a sustained period of low interest rates is seen as helping to boost the economy. In recent weeks, the difference between two- and 10-year yields has moved to its flattest level since March 2009. The yield curve now stands at 1.77 percentage points, in from 2.36 percentage points at the start of August.
Equities were rallying on Wednesday, cracking September’s slump, as some investors bet that fears about global growth and the eurozone fiscal mess were overdone, the FT reports. There was green across the screen from Asia to Europe as the mood switched to “risk on” after several sour sessions. “Havens” such as US Treasuries, the dollar and gold were falling back, while US stock futures suggested Wall Street’s S&P 500 would open with a gain of 0.9 per cent. The FTSE All-World index was up 1.2 per cent, boosted by a 2.2 per cent advance for Europe in early skirmishing and following a 2.3 per cent rebound in the Asia-Pacific region. The global benchmark has halted a four-session slide that saw it lose nearly 6 per cent in the first four trading days of the month. The main causes of those falls will be all too familiar to traders: concerns about a weakening global economy and the fallout from the budgetary stress in Europe. Weak US jobs numbers on Friday helped spark fresh concerns about the former. But a better than expected US service sector report on Tuesday and Wednesday’s firmer than forecast Australian GDP data have somewhat ameliorated the anxiety in that regard.
The chatter on Friday in response to the stomach-punching payrolls is that we’re headed for Operation Twist Part Deux — number 13 on our list of Fantasy Fed options — though not outright QE3 in the form of large scale asset purchases. At least not yet.
But that was already our guess after the last minutes were released. We had been expecting the debate to have already moved beyond the timing of the New Twist and toward its form. Read more
There’s been a lot of talk about how the US money market mutual funds are pulling their money out of the eurozone. And generally chopping and changing the nature of their investments.
But how exactly do the mechanics of that work, and what are the exposures? Read more
Bill Gross, manager of the world’s largest bond fund for Pimco, has admitted that it was a mistake to bet so heavily against the price of US government debt in an FT interview. Gross emptied his $244bn Total Return Fund of US government-related securities earlier this year in a high-profile call that has backfired as the bond market has rallied. As of Monday, Pimco’s flagship fund ranked 501th out of 589 bond funds in its category. See also FT Alphaville.
Yes, we know what happened today: gold down, dollar up, 10-year Treasury yields climbed to 2.30 per cent.
We heard. Jeeeeest a bit less room for Bernanke to let us down on Friday. Read more
Attention algobots, headline traders and French regulators.
In this post we are going to direct readers to some publicly available information about Lyxor’s (Societe Generale’s asset management arm) fixed income ETFs. It’s a point that possibly applies to other European synthetic providers too. This information has been publicly available for a long while. It is in no way unusual or suddenly available. We just thought it might be interesting to highlight. Read more
Gold has powered to a fresh record, revelling in investors’ fears of a sharp global economic slowdown that have laid waste to growth-focused assets, the FT reports. The bullion was up 2.3 per cent to $1,865 an ounce, having earlier touched $1,867; a surge that was also predicated on worries over the fiscal difficulties of developed nations and in particular how this was being expressed in the financial system of the eurozone. The same concerns were boosting perceived haven bonds, with German, US and UK yields sitting near record or multi-decade lows. The yield on the US 10-year note, which on Thursday breached 2 per cent for the first time since 1950 before paring its move, was down 2 basis points to 2.04 per cent. In contrast, the FTSE All-World equity index was down 1.6 per cent, taking its losses since May’s cyclical peak to more than 19 per cent. Asia has fallen 3.2 per cent, with South Korea’s Kospi bearing the brunt with a 6.2 per cent stumble, despite the authorities in Seoul suspending programme trading in an attempt to slow the slide.
Benchmark US borrowing costs fell below 2 per cent for the first time in at least 60 years as markets took fright at increasing signs of global economic weakness and equities worldwide, the FT reports. US 10-year Treasury bonds, the linchpin of the global financial system used to price many assets around the world, yielded as little as 1.97 per cent on Thursday, their lowest since April 1950, according to Global Financial Data. There were also savage falls for German and British borrowing costs, which hit record lows. “It is a moment. Why can’t Treasury yields have a 1 per cent handle given where growth is?” said Steven Major, global head of fixed income research at HSBC. The catalyst for the latest bout of risk aversion – which saw stock markets plunge globally and gold hit another record high – was weaker-than-expected US manufacturing and unemployment data. That came on top of a slew of bad growth numbers from Europe as well as rising fears about the funding of European banks. For more on how US Treasuries and high powered money may be becoming a Giffen good, see FT Alphaville.
Benchmark US borrowing costs fell below 2 per cent for the first time in at least 60 years as markets took fright at increasing signs of global economic weakness and equities worldwide, writes the FT. Bank share prices once again bore the brunt of the equity market sell-off. France’s Société Générale fell 12 per cent and Dexia of Belgium 14 per cent as short-selling bans failed to stem the sell-off. The Dax-30 index in Germany ended 5.8 per cent down, while the FTSE 100 in London was off 4.5 per cent. In New York, the S&P 500 closed 4.4 per cent lower. The Dow was off 3.7 per cent, below the 11,000 barrier. Reuters reports that Asian markets were faring little better once they opened on Friday — the Nikkei was down 2.1 per cent and the MSCI index down 2.9 per cent. Lex says the last thing we need is QE3 and we should all just wait and see. If only it were all so easy.
Markets were repricing assets to reflect a riskier environment as worries about global growth prospects and the lingering eurozone fiscal crisis continued to chip away at investor resolve, the FT reports. Equities were sliding and commodities prices were lower while action in currencies and bonds typified reticence, with perceived havens such as US Treasuries and the dollar receiving funds. The FTSE All-World equity index was down 0.8 per cent, Brent crude was off 0.2 per cent to $110.46 a barrel, the dollar index was up 0.2 per cent and the euro is down 0.3 per cent to $1.4397. S&P 500 futures forecast a 1 per cent fall for Wall Street. In Europe the FTSE Eurofirst 300 opened with a loss of 1.2 per cent as banks and miners lost ground. No fresh catalysts appeared to be behind the deterioration in sentiment; rather, it was a continuation of the malaise that has seen the FTSE All World index slip 15 per cent from its cyclical peak at the start of May.
An exasperated Michael Pettis always makes for an enlightening Michael Pettis column.
This time he trains his eye on the possible implications of the recent announcements by China that this time it means what it says about diversifying its reserve holdings out of USD assets. Sure. Read more
Heartbreaking. The FT’s Telis Demos points us in the direction of some barmy post-auction action in 30-year US Treasuries:
So, Swiss short-term market rates are now fully negative:
Strange, fast, markets. The S&P 500 closed at 1,172.53, up 53 points, or 4.74 per cent. That’s the biggest one day rise since 20 October, 2008. 10-year Treasury yields touched crisis lows. And the US dollar… don’t even ask.
Looks like QE2.0 is going down a treat in the FX and bond markets.
First, 3-year, 5-year, and 10-year charts. Read more
The US treasury conducted its first post-downgrade auction of Treasuries on Tuesday and, guess what, it’s a record breaker.
Three-year yields were sold at a record low yield of 0.5 per cent, which means the US could easily be confused for a AAA sovereign: Read more
Leaving aside the volatility and growth fears, who is really compelled to sell Treasuries as a result of the S&P downgrade?
The answer, when it has all played out, might go some way to explaining just how powerful the ratings agencies are right now. Or, how powerful they should be. The last few days have seen some passionate debate on that subject. Read more
Here’s this year’s biggest one day rise in US 10-year yields:
Rumours of S&P announcing something on the US rating after the bell are jostling for attention with the Berlusconi Bounce.
The spectre of an imminent US default on its debt disappeared as legislation to increase America’s borrowing authority cleared its last remaining hurdle in the Senate and was signed by President Barack Obama, the FT says. The last-minute congressional approval of an increase in the debt ceiling came after weeks of aggressive political rhetoric and fraught negotiations over fiscal policy that carried the country to the brink of a potential economic calamity, threatening its triple A credit rating and the status of Treasury bonds as a safe harbour for global investors. Bloomberg adds that for all the debt ceiling debate, the people with the most at stake made more money buying Treasury securities in July than any month this year.
China’s central bank governor urged Washington on Wednesday to act responsibly to deal with its debt issues, saying uncertainty in the US Treasuries market will undermine the international monetary system and hamper global growth, Reuters reports. The remarks by Zhou Xiaochuan, head of the People’s Bank of China, were China’s first official response to the passage of the US debt ceiling deal. Mr Zhou welcomed US progress in dealing with its debt problems but urged Washington to take what he called “concrete and responsible” measures to bolster confidence in Treasuries, of which China is a major buyer. Mr Zhou said China would watch developments related to the US debt-ceiling increase while continuing to diversify and strengthen risk management of its foreign exchange reserves, the WSJ reports.
The UK’s benchmark borrowing costs came within a whisker of their all-time lows on Monday as the rapid fall in gilt yields continued apace, reports the FT. UK 10-year bond yields hit 2.797 per cent, just above their lowest ever intraday yield of 2.794 per cent reached last August. Gilt yields have been on a seemingly relentless downwards trend since hitting their high for the year of 3.89 per cent in mid-February. Since then, investor expectations of an imminent interest rate rise by the Bank of England have receded while speculation about a second round of “quantitative easing” has grown. Gilt yields last week fell below those of US Treasuries for the first time in 15 months, but weak economic data in both the UK and US on Monday led to falls in yields for all the major triple-A rated government bonds.
Barring a Republican rebellion in the House of Representatives, the Budget Control Act of 2011 will be passed by both houses of Congress on Monday, and sent to the President for his signature.
Despite the resurrection of real market-shifting news on Monday, it’s worth quickly reflecting on the deal. A few other sites have done some post-mortems from a political or policy point of view. But see below for FT Alphaville’s debt ceiling winners and losers. (It was a lot harder to find winners than losers.) Read more
As FT Alphaville and others have duly noted, the search for the ultimate safe haven alternative is on.
RBS now points to one possible alternative, London luxury-home prices. Read more