Halister News

(Bloomberg) -- Forecast that projects roughly 50% of 2018 increase in issuance to be comprised of Treasury bills is “actually consistent” with the Treasury Borrowing Advisory Committee’s objectives of meeting increased demand for short-term securities and maintaining WAM “at or above current levels,” Morgan Stanley strategists Sam Elprince and Matthew Hornbach said in Nov. 3 note. 

• Treasury would be able to address bill shortage, which may worsen amid the continuous flows into government money funds; Treasury would also prepare for the possibility the Fed might consider eliminating or scaling back the RRP facility, which has been absorbing ~$300b in funds from domestic and foreign investors
• MS projects $717b net increase in issuance in 2018, including $337b in net T-bill supply, which accounts for 47% of the 2018 funding gap
• Even after accounting for fact that part of the increased funding is due to boosting the cash balance by $100b, bills would still be used to fill 38% of increased budget deficit, SOMA redemptions
• While the scenario may eventually lead to a drop in WAM, the drop would not occur until after 2021; MS expects share of T-bills to move into 25%-33% range by 2020
• TBAC has continued to acknowledge T-bill shortage in money market funds due to 2016 reforms, which resulted in funds’ AUM surpassing total amount of bills outstanding for the first time in a decade; T-bills now account for only 13% of total marketable debt outstanding vs 22% pre-crisis

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Greg Chang

Judge says she is inclined to let Manafort be freed from home confinement pending money-laundering trial https://t.co/OFE6EaeEjP

(Bloomberg) -- UST yield curves at the flattest levels in 10 years draw the attention of rates strategists; Barclays, Morgan Stanley and Societe Generale among those calling for the trend to continue, with events like Donald Trump’s Fed chair pick and the Treasury’s quarterly refunding statement out of the way. Bank of America is an exception, expects steepening in the intermediate part of the curve on easier fiscal policy and higher inflation.  

• Yield curves extend flattening Monday; 2s30s at ~118bps and 5s30s at ~81bps, while 2s10s at ~70.5bps in longest flattening streak in nearly two years
• Barclays (Rajiv Setia and Michael Pond, Nov. 3 note)
  • Maintain curve-flattener recommendation; had called for initiating 3s10s flattener a week earlier at 71bps, now at 60bps
  • The flattening trade would be vulnerable to increased issuance at long end of curve, but latest Treasury refunding meeting “suggests that this is not a near-term risk,” supporting their trade idea
  • Treasury likely to gradually increase sizes of 2Y, 3Y and 5Y auctions at February meeting
• Morgan Stanley (strategists led by Matthew Hornbach, Nov. 3 note)
  • Continue to suggest 2s30s flattening trade, though investors should be on alert to lighten up ahead of October CPI report released Nov. 15, which has “game-changing potential”
  • Should last CPI reading before December FOMC meeting miss expectations, market-implied odds of a hike could fall to 50%, which would steepen the curve 
• SocGen (strategists led by Bruno Braizinha and Subadra Rajappa, Nov. 2 note)
  • Recommend holding 3-month forward 2s10s bull flatteners
  • Enter tactical steepener in 10s30s TIPS breakevens at ~6bps, with target of 13bps; stop at 2bps; good through early November
• BofA (Ralf Preusser and Shyam Rajan, Nov. 3 note)
  • Expect steeper 2s5s and 3s7s yield curves because of easier fiscal policy, bigger deficits and higher inflation expectations
  • Short position in 5Y-10Y Treasuries “on the belief that tax reform chances are higher than priced in,” which would push term premium 40-60bps higher if passed
• Citi (strategists led by Jabaz Mathai, Nov. 3 note)
  • Treasury will increase coupon issuance in February; $2b quarterly increase seen in FRNs, $2b in 2Y-3Y and $1b from 5Y-30Y
  • Short-term bullish on TIPS, with a long position in 5Y breakevens based on expectations for higher energy prices and increases in some core categories
• Deutsche Bank (strategists led by Stuart Sparks, Nov. 3 note)
  • Look for 10Y yields to rise to 2.6% by year-end as market re-prices for higher terminal real short rate
  • Fed to hike in December, see end-2019 short rate of 2.15%
  • Even with a tax plan, persistent long-end demand for Treasuries from overseas investors and pensions to keep term premium subdued

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Vivien Lou Chen

(Bloomberg) -- Treasury bill supply may rise by at least $400b in 2018, “and perhaps by much more,” as the government addresses a larger financing gap and boosts its cash balance once the debt ceiling is resolved, Wrightson economist Lou Crandall says in note.

• Forecast assumes Treasury will gradually increase its coupon offerings during the year, which means “the bill sector would have to pick up the slack in the interim”
• TBAC recommended Treasury meet 25%-33% of its prospective funding gap through increased bill supply, which would imply $150b-$200b, assuming a $450b gap without a tax cut and $600b gap with a cut
• Boost to cash balance upon debt-ceiling resolution would add another $100b to bill issuance in 2018
• Committee’s recommendation “seems reasonable if applied on average to the cumulative financing gap for the next three or four years as a whole,” though next year Treasury is expected to meet a “much larger share of its incremental borrowing needs through bills”
• TBAC’s suggestion that Treasury extend issuance to 2-, 3-, 5-yr sectors indicates the “marginal benefits of further maturity extension” are smaller than in the “immediate aftermath of the financial crisis”
• Committee was “generally unenthusiastic” about the role of longer-term notes and bonds, though it doesn’t mean Treasury will be able to avoid increasing issuance in 10-, 30-yr tenors

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net Greg Chang