HALISTER1: UST Yield Rise Would Need Position Shift, Foreign Push: Analysis

UST Yield Rise Would Need Position Shift, Foreign Push: Analysis

(Bloomberg) -- Any sustained rise in Treasury yields will require a significant shift in long-term investors’ holdings, both domestic and foreign; potential triggers for these shifts would include strengthening economic data, which would trigger a quickening pace of Fed hikes and subsiding political risk, such as Brexit.
  • Bloomberg bond forecasts show 2Y at 1.13% end-2016 vs current 0.78%; 10Y 2.14% vs current 1.71%; 30Y 2.97% vs current 2.52%
POSITIONING
  • CFTC positioning data show asset managers in particular long 2Y and 5Y; leveraged funds net long Treasury bond futures
  • If yields do rise, “it will be a significant position shift where people are getting out,” Todd Colvin, senior VP at Ambrosino Brothers, says
    • “Accounts will be part of the problem, though part of a bigger group. You need China or someone with a significant portion of bonds to move”
  • There may be a lot of volatility around event risks in June and “the idea is if the hedge fund community is exiting, it’s going to get momentum,” says David Keeble, Credit Agricole strategist
FOREIGN DEMAND
  • Depreciation of CNY may lead to capital outflows and UST selling to repatriate capital, Marty Mitchell, independent strategist, says
    • NOTE: China’s UST holdings $1.24t as of March; link to all TIC data; Foreign official Treasury holdings with Federal Reserve at $2.9t on June 1, off July 2015 high at $3.03t
  • Demand from abroad has already waned in recent mos.; Keeble notes demand is driven by U.S. investors “coming home”
    • “There’s no yield in the world so you’re importing lower yields, not domestically generating higher ones”
TRIGGERS
  • String of positive economic data would cause markets to price in a more aggressive Fed; data so far in 2Q paint mixed picture
    • Following disappointing jobs, ISM services data for May, fed funds futures have repriced timing of next rate hike; first rate hike now fully priced in 1Q 2017
    • See also: RESEARCH ROUNDUP: Jobs Report Seen Deterring Fed This Month
  • Positioning becomes an issue when “inflationary pressure suggests the Fed is behind the curve,” which would “force investors to reduce exposure on the long end to shorten duration”: Mitchell
  • Improvement in euro-area economic data could cause markets to price a less-aggressive ECB, or even end of easing cycle
  • Other risks in June alone include:
    • German Constitutional Court ruling on ECB bond buying June 21
    • Yellen’s Humphrey-Hawkins testimony June 21
    • Brexit vote June 23
    • Spanish elections June 26
    • These events could stir volatility, in addition to quarter-end when “banks are collapsing their balance sheets”: Keeble
WHAT KEEPS RATES LOW
  • U.S. accounts for ~60% of all positive-yielding debt, 89% of positive-yielding debt that has a tenor of
  • Related story: UST Yields to Stay Low Amid Negative Rates Elsewhere, Citi Says
  • Auctions reflect long-term buyer demand for Treasuries, both domestic and foreign, with dealers awarded record lows in May’s 2-year (17.7%) and 5-year auctions (21.8%)
    • 5Y 66.6% indirect award was 3rd-highest on record; 2Y direct award 32.5%, highest since Oct. 2012
  • Related story: Negative-Yielding Sovereign Debt Grew to $10.4t in May: Fitch
    • Alert: HALISTER1
    Source: BFW (Bloomberg First Word)

    People
    David Keeble (Credit Agricole SA)
    Marty Mitchell (The Mitchell Market Report LLC)
    Todd Colvin (Ambrosino Brothers)

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    UUID: 7947283

    HALISTER1: JAPAN RATES WEEKLY: Curve Steepens on BOJ’s Bond Purchase Plan

    JAPAN RATES WEEKLY: Curve Steepens on BOJ’s Bond Purchase Plan

    (Bloomberg) -- Japan’s sovereign bond curve steepens, led by super-long end. BOJ’s bond purchase program for June, which was announced on May 31, is negative for super-long tenors given the amounts for 10y-25y tenor and 25y+ tenor decreased by 20b yen from May.
    • Click here for weekly change in yield curve and here for market snapshot
    • Ministry of Finance to sell 30-year govt bonds on June 7, and 5-year govt bonds on June 9
    • Nation’s final reading of 1Q GDP on June 8 to be released on June 8; est. 0.5% q/q vs 0.4% preliminary reading; economists sees final figure may be revised up due to stronger-than-expected 1Q capital spending
    • BOJ said it will buy fewer bonds with residual maturity of more than 10 yrs and up to 25 years; will purchase 220b yen in June, down from 240b yen in May; BOJ also to cut purchase size for tenors over 25 years to 140b yen from 160b yen
    • Prime Minister Abe announced on June 1 a delay to sales tax hike and promised bold economic steps in the autumn
      • S&P Global Ratings raised its real GDP growth forecast for Japan in 2017 to 1.0% from 0.4% earlier on delayed tax hike
      • Moody’s Investors Service says Japan’s sales tax delay is credit negative as it raises further questions over the government’s ability and willingness to meet its stated fiscal consolidation goals
      • Fitch awaits more details on revised fiscal plans before decision on Japan’s rating
    • Govt’s sale of 2-year bonds on May 31 drew strongest demand since Dec. 2014; sale of 10-year bonds on June 2 drew strongest demand since August 2014
    • WHAT THEY SAY
    • DIAM (Nobuto Yamazaki, executive fund manager)
      • Market cautious about a weak result for 30-year bond auction as current market rate is too low
      • 30-year yield may trade 0.29-0.39% range as auction may trigger volatility
    • JPMorgan Asset Management (Genji Tsukatani, fund manager)
      • Unless yields fall ahead of auction, 30-year and 5-year bonds auctions could go smoothly as market is getting used to low rates
    • Okasan Securities (Makoto Suzuki, senior bond strategist)
      • Market participants and investors unlikely to trade ahead of June FOMC and BOJ meetings
      • 5-year and 30-year bond auction may go smoothly as investors could buy on dips on back of large bond redemptions this month
    • NOTE: JGBs worth about 18t yen ($165b) will mature this month (excluding T-bills, linkers and floating bond), with large proportion June 20, according to data compiled by Bloomberg
    Alert: HALISTER1
    Source: BFW (Bloomberg First Word)

    People
    Genji Tsukatani (JPMorgan Asset Management Japan Ltd)
    Makoto Suzuki (Okasan Securities Group Inc)
    Nobuto Yamazaki (DIAM Co Ltd)

    Topics
    BFW Japan Rates Analyst Wrap

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    UUID: 7947283

    HALISTER: BARRON’S ROUNDUP: IPO Slump May Aid Stocks; Monsanto Could Slip

    BARRON’S ROUNDUP: IPO Slump May Aid Stocks; Monsanto Could Slip

    (Bloomberg) -- The disappearing IPO market may be good for stocks, with only 31 companies going public so far in 2016, fewer than half the tally of 69 a year earlier, Barron’s reported in its cover story of the June 6 issue.
    • In the 12 months following a year with fewer than 100 IPOs, stocks rise an average of 13.1%, according to data from Jay Ritter, a professor at University of Florida.
    • Regulatory hurdles and the growing importance of institutional investors rather than individuals are suppressing the number of initial offerings, Barron’s said.
    • IPO volume doesn’t mirror the rate of acquisitions of venture-capital backed companies, which has been “fairly constant” at about 120 deals per quarter for the past 10 years, Barron’s reported.
    • Transactions on the Nasdaq Private Market, an exchange for private stock, rose to $1.6 billion in 2015, Barron’s said.
    Other highlights from this week’s Barron’s (subscription required):
    • Whole Foods Market (WFM) may return 20% over the next year, including dividends, as cost cutting at legacy stores and new shop designs gain traction, Barron’s reported. The shares have fallen 19% from their high last July.
    • Monsanto (MON) may fall if Bayer (BAYN GR) is unable to complete its proposed purchase of the U.S. seed and chemical company, Barron’s said. Bayer has offered $122 a share for Monsanto, which rejected the bid but remains open to a higher price. Deutsche Bank analyst David Begleiter says Monsanto, which closed Friday at $111, could drop to $100 if the deal collapses.
    • Textbook publisher Houghton Mifflin Harcourt (HMHC) may rise 45% over the next two years or so as states refresh their teaching materials, Barron’s reported. Morgan Stanley analyst Denny Galindo estimates the shares may rise to $25 from the current $17.22.
    • Aluminum recycler Real Industry (RELY), backed by Sam Zell, could more than double as M&A has the potential to boost income while aluminum-processing agreements insulate the company from commodity volatility, Barron’s David Englander writes.
    • Cabela’s (CAB) shareholders should “seriously consider taking profits” after a 56% gain for the retailer of hunting and fishing supplies since its October low. That’s when Elliott Management disclosed that it had taken a large stake in Cabela’s and pushed the company to sell itself.
    Alert: HALISTER
    Source: BFW (Bloomberg First Word)

    Tickers
    MON US (Monsanto Co)
    CAB US (Cabela's Inc)
    HMHC US (Houghton Mifflin Harcourt Co)
    SGGHU US (Real Industry Inc)
    WFM US (Whole Foods Market Inc)

    People
    David Begleiter (Deutsche Bank Securities Inc)
    Denny Galindo (Morgan Stanley)
    Jay Ritter (University of Florida Foundation Inc)

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    UUID: 7947283

    HALISTER: NextEra’s Pursuit of $2.6 Billion Hawaii Deal Goes Past Deadline

    NextEra’s Pursuit of $2.6 Billion Hawaii Deal Goes Past Deadline

    Alert: HALISTER
    Source: BN (Bloomberg News)

    Tickers
    NEE US (NextEra Energy Inc)
    HE US (Hawaiian Electric Industries Inc)
    TXU US (Energy Future Holdings Corp/Old)

    People
    Constance Lau (Consuelo Zobel Alger Foundation)
    David Ige (State of Hawaii)
    Paul Patterson (Glenrock Associates LLC)
    Peter Cohn (Height Analytics LLC)
    Randy Iwase (Hawaii Public Utilities Commission)

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    UUID: 7947283