Halister News

(Bloomberg) -- Yields will rise as Trump’s fiscal stimulus boosts growth and inflation, though higher real rates and tighter financial conditions will limit the climb in nominal 10Y yield, TD strategists Priya Misra, Gennadiy Goldberg and Cheng Chen wrote in Nov. 21 note.

• Stimulus should imply faster Fed hikes; however, uncertainty about size of fiscal package and Fed’s focus on financial conditions may lead it to hike slower than expected
  • Rise in labor participation rate suggesting “slack in the system” and low neutral rate could also lead to slower pace of hiking
  • Expects market to price in at most 2 hikes in 2017
• Rates caught between dueling Trump policies of pro-growth and protectionism
• Headline CPI to approach 2.3% by Feb. 2017; core CPI expected to “continue to steadily inch” higher
• Global reach for yield and adverse economic effects of higher rates should limit how high yields can go

(Bloomberg) -- Current valuations are based on low defaults, support from the Fed and ultra-low volatility, which are all unlikely to continue in 2017, Morgan Stanley strategists led by Adam Richmond write in note.

• Base case scenario is for high yield total return of -2.7% and excess return of -2.4%, as the likely economic stimulus is expected to be offset by tighter financial conditions and less market-friendly policy changes
• Issuance volume forecast at $244b, lower than MS’s estimate for 2016
  • Expect a modest decline in refinancing, offset by M&A activity
• Project a 4.6% default rate in high-yield bonds for 2017
• Fundamentals look weak across markets, late-cycle risks loom large and the Fed could push the market to the exit quicker
• Credit could be impacted by subpar growth and the Fed withdrawing liquidity and hiking rates
• Recommend BBs and lower levered single-Bs over CCCs next year

(Bloomberg) -- Capital market conditions are expected to stay robust heading into 2017, with high yield remaining constructive, even as global central banks are poised to pivot away from their current dovish policies, JPM strategists led by Peter Acciavatti write in note

• New issuance forecast at $300b next year, or a $25b increase y/y, driven by an uptick in M&A activity, which should offset a modest decline in refinancing
  • JPM estimated $275b in issuance this year
• Estimate above-coupon full-year return of 8.3%, which would outperform the majority of fixed-income alternatives, driven by accelerating top-line performance of corporates amid better-than-expected economic conditions
• Expect total return of 10%-12% led by more accommodative than expected global central bank policies even as they gradually pivot away from their dovish stance
• Decreased regulation, positive tax reform, increased fiscal spending and less congressional gridlock could produce favorable backdrop for corporate earnings and conditions for high yield next year
• Republican sweep of U.S. elections is seen as pro-growth for U.S. corporate earnings and U.S. economy
• High-yield bond spreads offer strong relative value in the context of an anticipated intra-cycle decline in defaults
• HY default rate forecast to decline to 2.5% in 2017 given an improved fundamental backdrop for commodity credits coupled with a gradual pace of Fed tightening alongside better global economic conditions
  • JPM revised 2016 default forecasts twice this year, from 3% to 4.5% and then to 6%, dominated by energy and commodities sectors
• Expect spreads to tighten to +475bps by end-2017, absorbing the expected 40bps rise in 5Y Treasury yields
• Downside risks include a more aggressive Fed than expected, a more substantial rise in Treasury yields, political missteps with economic ramifications and/or a 10-20% slide in commodity prices led by oil

(Bloomberg) -- Brazil traders and economists mostly expect BCB to keep the current pace of easing as Trump-led volatility on BRL may prevent the bank of more aggressively acting. Potential of change in statement is considered.

• Traders in the DI markets project 30.08bps cut for the Weds. BCB decision, closer to 25bps than 50bps cut; in a Bloomberg survey, 27 economists forecast Selic cutting by 25bps to 13.75% and 6 estimate Selic will drop to 13.50%
• U.S. election outcome added uncertainty to the global macro backdrop facing many EM economies, Alberto Ramos, senior- economist at Goldman Sachs, wrote in a report
  • “Beyond potential trade protectionist policies, the expected policy mix by the incoming administration was perceived to lead to higher dollar yields and a stronger USD in global markets”
• Besides cutting Selic by 25bp, BCB statement may recognize that external scenario became more “cloudy” after election in U.S., Olavo Souza, economist at Mirae Corretora, says in a phone interview
  • Markets may stay volatile through January, until the Trump government plans become clear
  • While the recent price indexes have improved, the implicit inflation -- which is at 6.7% for one year -- stays above the BCB targets
• Inflation’s recent signs of slowdown, weak activity and progress seen in fiscal agenda could lead BCB to accelerate pace to 50bps; however, after post-Trump risk aversion wave pushing USD to 3.40/BRL versus previous ~3.20, BCB likely to keep the 25bps cut, Newton Rosa, chief-economist at SulAmerica Investimentos says
  • BCB may cut 25bps while discussing the possibility of a 50bps reduction given the weakness of the economy, Banco Fibra economist Cristiano Oliveira says
  • BCB may choose to tweak its language to suggest that the possibility of faster easing is starting to blink on the radar screen for coming policy meetings, BNP writes in a report

(Bloomberg) -- (Adds comments from BMO, Deutsche Bank, JPMorgan and SocGen to roundup originally published on Nov. 16) Even though a Republican-controlled government will likely make a U.S. debt limit increase easier than years past, Treasury will still need to cut bill supply as a deal may not be reached by March 15, when the debt limit is set to be reinstated, analysts say.

• Debt ceiling was suspended at $18.11t until March 15 by an agreement reached in November 2015; U.S. public debt subject to limit was at $19.9t as of Nov. 23, CHART
  • The 2015 pact includes condition that Treasury’s cash balance must be at same level it was when the agreement was made, ~$23b, which will require Treasury to cut its cash balance from current level of ~$420b
• March 15 is considered a “soft” deadline, as Treasury can employ extraordinary measures to stay under the debt ceiling at least through late summer 2017
  • Extraordinary measures include suspending sales of State and Local Government Series Securities (SLGS), redeeming existing and suspending new investments of Civil Service Retirement and Disability Fund and Postal Service Retirees Fund (CSRDF), Exchange Stability Fund (ESF) and Government Securities Investment Fund (G-Fund)
• Treasury bills maturing March 2-March 30 yielding 50bp-52bp

• BMO (Ian Lyngen and Aaron Kohli)
  • Any “sort of debt-limit reduction” in Treasury bills will squeeze supply into year-end or early next year and further increase demand for any high-quality front-end paper
  • A delay in raising the debt ceiling may reduce front-end supply, create an “interesting dynamic” early in the new year and later this year as Fed prepares to hike rates

• BofAML (Mark Cabana)
  • Republican sweep of U.S. election only “marginally reduces” risk that the debt limit will bind on March 16, though Treasury can use extraordinary funding measures to “stave off a default until around mid- summer”
  • Once Trump is inaugurated Jan. 20, debt limit may be a “low priority” since there won’t be an “imminent default risk”

• Barclays (Joseph Abate)
  • Congress may take months to re-suspend the debt ceiling, especially since the Republicans have a “thinner majority” in the House and the party is “hardly unified”
  • If ceiling not raised after June 30, may create “significant lumpiness” in bill issuance
  • Treasury will still have to cut ~$125b bill issuance in first 10 weeks of 1Q in order to get its cash buffer to ~$25b from est. $390b at end of 2016

• Citi (Steve Kang)
  • Unlikely new government will come up with a resolution before the debt ceiling is reinstated March 15, given the tight schedule after Jan. 20 inauguration
  • Treasury Secretary likely to use “playbook from 2015” and bring the cash balance down to $23b, which will keep bills/agencies rich and RRP usage high
  • Treasury can use “extraordinary measures” until around October 2017, though Republican majority may smooth budget talks that come with debt ceiling negotiations

• Credit Suisse (Praveen Korapaty and others)
  • Republican majority in Congress “will avoid creating too much drama around raising the debt ceiling” for Trump, though resolution isn’t likely until closer to the end of the suspension period in March
  • Hold long T-bills/short OIS into March 15 suspension deadline

• Deutsche Bank (Steven Zeng)
  • Debt ceiling’s “hard deadline” may come earlier this year, disrupting bill supply in summer instead of fall
  • Gross receipts already growing at a slower rate than last year as labor market growth “continues to moderate”
  • Treasury could run out of cash “even earlier” if there’s new tax cuts next year and “incremental spending” is “worked into the new budget”

• JPMorgan (Alex Roever and others)
  • Increase in T-bills unlikely to occur during 1Q ahead of federal debt limit reinstatement on March 16
  • Treasury has been operating a “much higher” cash balance than prior years, which may result in “even more significant reductions in bill supply”
  • Even with Fed’s O/N RRP as a backstop, cut in bill issuance may “prove disruptive to the short-term markets” if debt ceiling isn’t suspended or raised by deadline

• RBS (Blake Gwinn)
  • “There’s no appetite for a fight. It doesn’t seem like it really behooves anyone, but it won’t be soon enough”
  • Treasury still going to have to cut bill supply and “the distance they have to go this time versus previous debt ceilings is pretty considerable”
  • “Big tail risk” would be factions of GOP holding up debt limit deal
  • Wouldn’t be surprised if the government reverted back to the process where the debt ceiling is raised when budgets are passed

• SocGen (Subardra Rajappa and others)
  • Forcing Treasury to whittle its cash balance to $23b by mid-March is “much against its stated mandate of normalizing bill supply” relative to coupon issuance in coming years
  • May translate to higher demand for O/N RRP from government money funds amid rise in assets; should push OIS higher, put narrowing pressure on Libor-OIS spreads

• TD (Gennadiy Goldberg)
  • Republican sweep will ensure “very little drama,” though there’s still some uncertainty as debt ceiling will require winding down issuance in the early part of the year
  • While Treasury is expected to increase bill issuance by $275b, there’s a chance supply may be “even more extreme” if Trump stimulus “comes to fruition”
  • “One of the best times” for Treasury to increase bill issuance after large shift into government money funds after reforms, which should temper any widening in bill/OIS spreads

• Wrightson (Lou Crandall)
  • “Toss-up” between “business as usual and a very painful supply shortage”
  • $300b contraction in bill supply during span of a few months “would be unwelcome in the best of circumstances and could be particularly disruptive in this particular context”
  • An “alternative interpretation” of the rules would allow Treasury to keep a larger, more prudent cash balance without “frustrating Congress’s intent” with respect to debt limit, wouldn’t alter timetable for “eventual drop-dead date” in 2H 2017

(Bloomberg) -- ECB President Mario Draghi speaks at the European Parliament’s Economy Committee about the ECB’s perspective on economic and monetary developments and the consequences of Brexit for euro area financial stability.

• Text will be available on ECB website
• See ECB weekly schedule
• NOTE: ECB’s Draghi says Brexit, Trump win will have long- term impact

(Bloomberg) -- German 10y bund yield breaching up-trendline (0.21%) from late September, which could warn of further corrective action; important gap window at 0.20%-0.22% also being eroded, Bloomberg technical analyst Sejul Gokal writes.

• See chart; now -4bps to 0.20%
• Resistance at 0.18% and 0.16%
• European stocks lower, with banking sector leading losses spurred by yield curve flattening

• NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

(Bloomberg) -- Over the coming year, investors should underweight bunds and JGBs, overweight U.K. gilts and adopt a neutral stance toward U.S. Treasuries, Morgan Stanley strategists including Anton Heese write in client note.

• USTs are mostly priced for rate hikes that Morgan Stanley expects the Fed to deliver, though bund, gilt and JGB markets aren’t priced vs their expectations for central bank policy
• Expect Treasury market selloff to continue into the first 100 days of Trump’s presidency as he starts laying the groundwork for his fiscal policy agenda; forecast 10y yields to end 1Q 2017 at 2.50%; FOMC to deliver two hikes in 2017
• In the euro area, after a six-month QE extension in Dec., the improved inflation outlook should mean ECB starts to guide the market towards its intention to taper asset purchases
• In the U.K., expect gilt market to outperform vs USTs and bunds as Brexit uncertainty weighs on the economy, keeps the MPC accommodative despite rising inflation
  • Look for BOE to end its QE program, but will cut rates by the middle of 2017
• In terms of trades, like 5s30s steepeners in the U.S., U.K. and Japan; 2s10s steepeners in Germany over the first six months of 2017
  • See the Treasury, bund and JGB curves bear-steepening relative to forwards, while expect gilt curve to bull- steepen
  • Would see the 1H steepening of bund, Treasury curves as an opportunity to enter bear-flatteners for the back half of the year
    • Top trades for 2017 include long gilts vs bunds and long JGBi breakevens