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Screen Shot 2018-10-24 at 6.36.50 PMMorning Meeting Notes QuickNotes


(Bloomberg) — Treasuries added to their Asia-session gains and ended the U.S. trading day near session highs despite soft reception for the 5-year auction; advance was led by intermediates, richening the 5- and 7-year sectors on the curve. Price action during U.S. afternoon lacked a catalyst beyond equity weakness, yet futures volumes were marginally above average.

  • Yields lower by more than 7bp in belly, less in front- and back- end, richening 2s5s30s fly by 6bp despite $39b 5-year auction and $31b 7-year sale ahead Thursday
    • Richness on the curve would likely discourage bidders, strategists said; auction tailed by 0.6bp and produced 1.9% direct bidder allotment, weakest since 2009; Tuesday’s 2-year sale also drew small direct bid
  • Volumes in 10-year futures were around 110% of 10-day average into cash settlement at 3pm New York time
  • Most of the day’s price action occurred during U.S. morning; Treasuries tracked bunds higher into the London close as Italian bonds dropped; U.S.-German 10- year spread moved back below 271bp
  • In Treasury options, interest in upside protection in 10-year notes reappeared; flows included TYZ8 119/120.5 call spread bought via block in 10.7k at 17 ticks, and TYZ8 123.5 calls bought in 20k at 1 tick
  • Eurodollar strip bull flattened with greens (Dec20-Sep21) and blues (Dec21- Sep22) higher by 6.5bp to 7.5bp on the day; EDZ8/EDZ9 spread flattened further, reaching 43bp as 2019 Fed hike premium fades
    • OIS market prices in 18bp for December meeting and two hikes by July; December 2019 OIS prices in 62bp vs 67bp on Tuesday

Image result for repo man

(Bloomberg) — Now that the gap between the effective fed funds and interest on excess reserves rates has been eliminated, it’s more likely that the Federal Reserve will raise IOER by less than 25bp at the December FOMC meeting.

  • People who are watching the repo markets “like hawks” are “thinking/hearing that the IOER might only increase by 15 basis [points] in December if the Fed goes 25 … effectively slowing down,” Andrew Brenner, the head of international fixed-income at NatAlliance Securities in New York, said in Wednesday note
  • While the tweak could occur at the November meeting, “we’re very skeptical that the Committee would take this leap without having prepped investors well in advance via some form of very clear forward guidance,” BMO strategists Jon Hill, Ian Lyngen and Ben Jeffery said in Wednesday note
    • Now that fed funds is 5bp from the top of the target range, there should be no need “for a surprise adjustment in a couple weeks, which could risk increasing uncertainty if the move is perceived as the Fed falling behind the curve”
  • The Fed may be forced to acknowledge that factors such as bank liquidity needs are contributing to a rise in the central bank’s benchmark rate
    • Story: Rising Fed Funds Rate to Sharpen Focus on Bank Reserves Question
  • The effective fed funds rate rose to 2.20% on Tuesday from 2.19% the prior session, according to New York Fed data; with IOER at 2.20%, the spread of IOER over fed effective has been eliminated
  • Fed funds traded in a 2.17%-2.35% range Tuesday, with volume at $58b, according to data posted on the New York Fed’s website; the 75th percentile rate was 2.20%
    • Fed’s overnight bank funding rate set at 2.18% on Tuesday; market volume was $132b
  • Seven counterparties took $6.4b at the Fed’s reverse repo operation Wednesday, up from $4.5b on Tuesday


  • SOFR, the Alternative Reference Rates Committee’s preferred benchmark to eventually replace Libor, set at 2.17% as of Oct. 23, New York Fed data show
  • Other rates based on Treasury repo transactions:
    • Broad General Collateral Rate (BGCR) set at 2.15%
    • Tri-party General Collateral Rate (TGCR) set at 2.15%
  • O/N GC repo 2.25/2.15, opened at 2.26/2.24
  • 1-wk repo 2.28/2.26
  • 2-wk repo 2.27/2.25
  • 1-mo repo 2.30/2.27
  • GC repo poised to rise for the rest of October amid Treasury bill and coupon settlements, and dealers pulling back from the funding markets
    • This week’s bill auctions will raise about $16b of new cash upon settlement
  • Daily total UST, agency repo fails fell to $31.4b Oct. 23, below the 5-DMA $35.7b, DTCC data show; compares with $43.5b Oct. 22


  • Treasury’s cash balance rose to $374b on Oct. 23 from $373b on Oct. 22
  • Treasury bills held by primary dealers rose to $21.4b in the week ended Oct. 10 from $12.3b in the week prior
  • 1-mo Treasury bills 2.201%
  • 3-mo Treasury bills 2.328%
  • 6-mo Treasury bills 2.461%
  • 12-mo Treasury bills 2.621%
  • 1-mo discount notes 2.18% on Oct. 24
  • 3-mo discount notes 2.26% on Oct. 24


  • Issues of AA financial paper with 81+ days to maturity totaled 31 on Oct. 23 vs 48 on Oct. 22; compares with 25 on Oct. 19
    • 1-mo AA financial CP 2.20% Oct. 23
    • 3-mo AA financial CP 2.43% Oct. 23
  • Total outstanding CP fell to $1.083t in the week ended Oct. 17 from $1.102t the prior week; foreign financial paper fell to $308b in the week ended Oct. 17, from $313b
  • O/N Libor 2.1751% vs 2.1739% Tuesday
  • 1-mo Libor 2.2941%, highest since November 2008, vs 2.2814%
  • 3-mo Libor 2.5080%, highest since November 2008, vs 2.4899%
  • 6-mo Libor 2.7598%, highest since November 2008, vs 2.7476%
  • 12-mo Libor 3.0394%, highest since November 2008, vs 3.0344%
  • Libor-OIS widened to 23bp from 21.1bp prior session

Junk Bond CDX Index at Fresh Two-Year Low as Stock Rout Deepens
(Bloomberg) — The Markit CDX North America High Yield Index fell 0.27% to 105.15 as of 3.20 p.m. New York time, the lowest since December 5, 2016, as the sell-off in U.S. stocks picked up steam.

  • Industrials, materials sectors sold off most; health care lost least
  • Trading volume was lower than average for the day
  • The sell-off in U.S. stocks picked up steam as mixed corporate earnings and weak housing data fueled anxiety that rising prices will crimp economic growth

The U.S. housing market is losing momentum. Purchases of new homes fell more than estimated in September to an annualized pace of 553,000, the weakest level in almost two years, according to government data Wednesday. While a strong job market and healthier finances signal demand is unlikely to suddenly collapse, potential buyers are increasingly constrained by rising property prices, higher mortgage rates and a scarcity of affordable listings.

The Canadian dollar strengthened and remains up after the country’s central bank raised interest rates 25 basis points to 1.75 percent Wednesday as forecast. Behind the reaction was a more hawkish tone than expected: The bank said the policy rate would rise to neutral and removed the reference to a “gradual” approach.

Asia Currencies Gain Appeal Vs Non-Dollar G-10: FX Macro Ranking

(Bloomberg) — The Indonesian rupiah, Philippine peso, Malaysian ringgit and Indian rupee are becoming attractive against short biases in EUR, JPY and GBP.

  • NOTE: Click here for today’s FX macro fundamental scorecard
  • Long- term bullish/bearish biases of currencies:
    • PHP and MYR overall biases remain bullish
    • IDR and INR overall biases turn bullish
    • GBP overall bias turns bearish again
    • EUR and JPY overall biases remain bearish
    • IDR, PHP, MYR and INR all offer high real rates and are backed by countries experiencing strong economic growth; they are four of the five cheapest currencies in the world according to IMF PPP metrics, with TRY being the fifth
    • GBP, JPY and EUR all offer deeply negative real yields and are backed by slow-growing countries with large debt piles; they are the three cheapest G-10 currencies, according to IMF PPP metrics but there’s no impetus for that discount to be erased while their central banks pursue easy monetary policy
  • NOTE: The FX Macro Fundamental Scorecard presents long-term relative-value comparisons; trading dynamics are captured by the trend/momentum filter, which is based on momentum indicators against primary trading partners across four time spans

(Bloomberg) — Chinese stocks are approaching a bottom, if they’re not already there.

  • Given China’s preference for gradualism, there are few cases rising to the same level as Mario Draghi’s “whatever-it-takes” endeavor to save the euro in 2012. The epic rescue of the stock crash in 2015 was one. This week’s full-court press to salvage the market and address the private funding challenge would be a close second
  • At least three major factors contributed to China’s stock rout this year. In addition to the trade tensions and deleveraging, domestic investors are really confused about the government’s intentions toward the private sector. Speculation is widespread that President Xi Jinping favors so-called “Guo Jin Min Tui”: the state advances, the private sector retreats
  • Why all of sudden is there such pessimism? To begin with, private companies are being hit hard by the deleveraging campaign. The anti-corruption drive makes state bank officials reluctant to lend to private companies out of concern any future loan loss could lead to corruption charges. The difficulty securing funding prompted companies to pledge corporate shares as collateral for borrowing. As stock prices go down, margin calls kick in, triggering liquidation and starting a vicious circle
  • A few leveraged private companies facing operational difficulties have been merged into the SOEs, which further created the impression that state capitalism is the way forward
  • That concern should be put to bed by now. In a lengthy interview with Xinhua News Agency last week, Vice Premier Liu He — Xi’s right-hand man — unequivocally supported private companies. (Xi himself voiced his “unwavering” support for the private sector two days later.) Liu pointed out that non-state companies contribute to over 60% of GDP and provide 90% of new jobs.
    • More importantly, Liu said: “Some people think it’s safe to lend to SOEs, whereas there’s a political risk to provide loans to private companies … This view and practice are completely wrong. We must elevate this issue to the level of politics and must take a holistic view”
  • In the Party’s lexicon, that’s equivalent to almost an ultimatum to bank officials: Lend to small private companies or you will be punished
  • This isn’t just talk. The government, regulator and central bank have come up with a list of measures to support the market and economy. They include increasing loans to private firms, easing forced sales of pledged shares and encouraging institutional investors to invest in stocks. More should be expected
  • Meanwhile, Xi is steadily pushing forward his reform agenda as this year marks the 40-year anniversary of China’s opening-up in 1978. Over the weekend, the government announced a sweeping tax cut. It is set to give a big boost to consumption
  • Whatever it takes doesn’t mean a massive stimulus is on the way. It’s about letting credit flow to those who deserve it. How to ensure not to throw good money at zombie companies and avoid moral hazard is a daunting challenge. But a private sector starving of credit is a sure bet for disaster. What Beijing did this week has sent a powerful message that they are on top of it
  • There’s no guarantee that the Shanghai Composite won’t fall tomorrow. But the economy is on track to meet the government target this year, far better than what the equity market is reflecting. What investors need is confidence. This week, they may have gotten some

U.S. Investment-Grade Issuance for October 24, 2018

(Bloomberg) — SunTrust Bank’s $1.4 billion three-part debt offering was the largest investment-grade deal Wednesday as activity returned to the primary market following no corporate issuance on Tuesday.

  • Deals from National Rural Utilities, Kimberly-Clark and Oglethorpe pushed the day’s total issuance to about $3b
  • The nearly $6b in new supply at the mid-week falls short of estimates for for up to $20b this week
  • Japan Bank for International Cooperation priced $3b of debt in two parts, while fellow SSA borrower Province of Alberta expects to price a 5Y $benchmark note tomorrow
  • EM issuer Oman is selling a $1.5b 7Y Sukuk bond
  • The pipeline for possible deals includes REC Ltd. and PT Pertamina (Persero), which are holding investor meetings this week, and Bank Nederlandse Gemeenten plans to start investor calls Friday for a 3Y sustainability bond

ISSUANCE STATS Day   $3.025b WTD   $5.975b MTD  $75.675b YTD $971.559b *T DEALS

  • SunTrust Bank (STI) Baa1/A-, $1.4b across 3 tranches
    • $600m 3NC2 Fxd-to-FRN at +70; +72a, +85-90 area
    • $300m 3NC2 FRN at 3mL+50; L equiv
    • $500m 7Y at +103; +105a, +115 area
  • Kimberly-Clark Corp (KMB) A2/A
    • $500m 10Y at +85; +90a, +high 90s
    • Announced as ’will not grow’
  • Oglethorpe Power Corp (OGLETH) Baa1/BBB+
    • $500m 30Y at +175; +175#, +190-195
    • Deal upsized from $400m
  • National Rural Utilities Cooperative Finance Corp (NRUC) A1/A, $625m across 2 tranches
    • $325m 10Y at +78; +80a, +95 area
    • $300m 30Y at +108; +110a, +125 area
    • Deal upsized from $600m

(Bloomberg) — Raw-sugar futures rise to the highest since January as output falls in Brazil, the world’s top producer and exporter. Aggregate trading for this time jumps 70% above the 100-day average, according to data compiled by Bloomberg; 1H October output in Brazil’s Center-South fell 44% y/y, industry group Unica says Wednesday


C-S output fell to 1.12m tons from 1.99m a year earlier; analysts forecast 1.1m in a Bloomberg survey Sugar content in cane fell 2.7% to 142.5 kilos/ton NOTE : Sugar Production in India Hurt by Infestation of White Grubs


Sugar futures for March delivery rise 1.7% to 14.05c/lb on ICE futures in U.S. in N.Y. after reaching 14.24c, the highest for a most-active contract since Jan. 12 This month, the price soars 25%, heads for the biggest gain since August 2009

Market talk Unica figures “were expected, although still bullish,” Michael McDougall , senior vice president at ED&F Man Capital Markets in N.Y., says in an email Wet C-S weather in Center-south had less of an impact than expected, Dev Gill, head of sugar & grain options at Marex Spectron in London, says in an email “In our view, it signifies how potent systematic covering continues to be dictating a lot of the order flow” behind the rebound In the week ended Oct. 16, hedge-fund  holdings  in futures and options flipped to bullish after 10 months in bearish territory, CFTC data showed on Oct. 19

Other soft commodities Arabica-coffee futures for December delivery rise 0.1% to $1.2125/lb after climbing as much as 2.7%  Orange-juice futures for January delivery advance 1.3% to $1.393/lb On Tuesday, the price touched $1.356, the lowest since March 26 Aggregate trading rises 26% above the 100-day average, according to Bloomberg data

(Bloomberg) — Wheat futures slumped to a five-week low in Chicago amid ample world supplies and sagging demand for exports.


Russia’s  Agriculture Ministry Raises Outlook on Wheat Crop Russia’s crop estimate may be 109m tons, about 3 percent higher than before, as weather benefited the harvest progress in Siberia

NOTE: Oct. 22: USDA Says Wheat Inspections Fell Last Week Wheat inspections fell to 385k tons vs 458.5 in previous week


Dec. wheat futures tumble 1.1% to $5.03 1/2 a bushel after falling as much as 1.3% to $502 1/2 a bushel, the lowest since Sept. 14

Market talk “Our exports have certainly slowed, and with the higher dollar, that’s not going to help,”  Brian Hoops , a senior market analyst for Midwest Market Solutions in Springfield, Missouri, says in a telephone interview There is a lack of global supply issues as Russia has ample crop to continue to export

Outside markets  

On the CBOT, Dec. corn futures fell as much as 0.7% to $3.67 3/4 a bushel Jan. soybean futures fell as much as 0.8% to $8.64 a bushel, touching the lowest price since Oct. 11

-R.W.N II, yours in 322.

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