Treasuries central clearing reduces basis trades risks, says Moody’s

NEW YORK, Nov 13 (Reuters) – An expansion of central clearing in the U.S. Treasuries market would reduce liquidity risks associated with a popular hedge fund arbitrage trading strategy that could strain the broader financial markets if it unravels abruptly, said Moody’s.

So-called basis trades in U.S. Treasuries take advantage of the premium of futures contracts over the price of the underlying bonds. The trades – typically the domain of macro hedge funds with relative value strategies – consist of selling a futures contract, buying Treasuries deliverable into that contract with repurchase agreement (repo) funding, and delivering them at contract expiry.

Most hedge fund activity in repo markets – where banks and other players such as hedge funds borrow short-term loans backed by Treasuries and other securities – is done bilaterally between brokers and customers.

But more centrally cleared trades could reduce the risk of disruption to counterparties caused by a rapid unwinding of hedge funds’ leverage, the rating agency said in a note.

“The Treasury basis trade plays a crucial role in minimizing the price gap between Treasury futures and their underlying cash securities, but it also amplifies the exposure of highly leveraged hedge funds conducting such trades to market shocks, increasing counterparty risk for dealers and central counterparty clearing houses (CCPs),” said Moody’s.

“Participation in centrally cleared transactions can significantly reduce this counterparty risk,” it said.

Central counterparty clearing houses such as those operated by CME Group, the world’s largest derivatives exchange operator, and the Fixed Income Clearing Corporation, currently the chief clearer of Treasuries, can “dynamically and prudently increase collateral requirements when markets dislocate,” said Moody’s.

The unwinding of basis trades likely exacerbated a crash in the world’s biggest bond market in 2020, and the trading strategy has been under close scrutiny from regulators worried about a recent buildup of leveraged positions in Treasuries.

Treasury market participants are awaiting updates from the U.S. Securities and Exchange Commission about a key reform the regulator proposed in September last year, which would force more trades to central clearing.

“We view the proposal as credit positive because it would enhance the oversight, transparency and risk management of transactions involving US Treasury securities as well as reduce systemic risk,” Moody’s said.

(Reporting by Davide Barbuscia. Editing by Sam Holmes)

((Davide.Barbuscia@thomsonreuters.com; +1 917 285 3067; Reuters Messaging: davide.barbuscia.reuters.com@reuters.net))

APEC’s growth to slow as persistent inflation, US-China tensions weigh-report

SAN FRANCISCO, Nov 12 – Economic growth among Asia Pacific Economic Cooperation countries is expected to decline next year and remain below the global average as higher interest rates slow U.S. growth, as China continues to struggle with its recovery and tensions between the two hamper trade, the body said on Sunday.

The APEC Secretariat’s Policy Support Unit issued new forecasts on the eve of the APEC leaders’ summit in San Francisco, showing that the 21-country region’s growth rate would dip to 2.8% in 2024 from 3.3% in 2023.

The APEC GDP growth rate will average 2.9% in 2025 and 2026, below the global average of 3.2% and 3.5-3.6% in the rest of the world.

Among key downside risks for the Pacific Rim region are persistent inflation associated with export restrictions, weather conditions that have raised the price of rice and other agricultural products, and disruptions in the fertilizer supply chain. Taming inflation could require more monetary policy tightening, slowing growth further.

Trade volume growth for goods is set to rebound next year among APEC countries after a largely flat 2023 due to China’s sluggish growth, rising to 4.3% for goods exports and 3.5% for goods imports. But growth of both exports and imports are forecast to peak at 4.4% in 2025, declining slightly in 2026 due to geo-political fragmentation that is disrupting longstanding supply relationships.

Carlos Kuriyama, director of the APEC policy support unit, said the data show that it was important for the U.S. and China to patch up their differences after years of tariff battles and national security export restrictions.

U.S. President Joe Biden and Chinese President Xi Jinping are expected to meet in-person for the first time in a year on Wednesday in a high-stakes session aimed at curbing tensions between the world’s two largest economies.

Kuriyama said that national security-driven export controls and other restrictions between the U.S. and China are driving up costs in supply chains that were previously optimized for efficiency. While a full return to pre-COVID-19 trading patterns is not possible, avoiding further fragmentation is important, he added.

The data shows “how important it is to re-engage, de-risk and avoid decoupling” of the US and Chinese economies. “I think a stable relationship within US and China is a win-win situation for everyone,” Kuriyama said.

(Reporting by David Lawder Editing by Stephen Coates)

Higher US yields hurt Asia equities; yen hits one-year low

TOKYO, Nov 13 – A tick up in U.S. Treasury yields on Monday helped send the dollar to a fresh one-year high against the yen, while scuppering an early tech-led equity rally.

Benchmark 10-year Treasury yields US10YT=RR pushed to a one-week high of 4.668%, testing the top of its range since soft non-farm payroll figures at the start of the month stoked bets for earlier Federal Reserve rate cuts.

The dollar climbed to 151.78 yen for the first time since mid-October of last year, despite being stable against the euro and sterling.

Japan’s tech-heavy Nikkei gave up early gains of more than 1% to end the day almost flat.

Tech still outperformed to help Hong Kong’s Hang Seng keep its head above water, against the drag from a 1.2% slide in an index of property shares. Mainland Chinese blue chips slipped 0.24%.

U.S. equity futures also pointed 0.44% lower, following Friday’s 1.56% rally for the S&P 500.

Nomura Securities strategist Naka Matsuzawa said equities are likely close to a peak.

“Up until now the market has been taking bad economic news as good news, because that would mean a pause in Fed rate hikes,” he said.

“But now, the Treasury market has already priced in a pause, so there’s not much room for Treasury yields to fall further,” removing a support for the stock market, he added. “In short, I don’t think the stock market rally is going to continue.”

The week is packed with big risk events, from consumer inflation and retail sales figures from the United States on Tuesday and Wednesday respectively, with Chinese retail sales also due Wednesday, following lacklustre sales growth at the annual Singles Day shopping festival over the weekend.

The marquee geopolitical event is also mid-week, with a meeting between US President Joe Biden and Chinese leader Xi Jinping on the sidelines of an Asia-Pacific Economic Cooperation (APEC) summit in San Francisco.

Investors, however, paid little attention to a Moody’s announcement late on Friday that it had lowered its outlook on the US credit rating to “negative” from “stable”.

Crude oil prices eased on Monday as demand worries trumped supply concerns, amid slowing growth in the United States and China. O/R

Brent crude futures for January were down 71 cents, or 0.87%, at USD 80.72 a barrel, while the U.S. West Texas Intermediate (WTI) crude futures CLc1 for December were at USD 76.49, down 68 cents, or 0.88%.

Both benchmarks gained nearly 2% on Friday as Iraq voiced support for oil cuts by OPEC+.

(Reporting by Kevin Buckland; Editing by Christopher Cushing)

Oil settles up 1% as OPEC report dampens demand concerns

BENGALURU, Nov 13 – Oil prices rose by more than 1% on Monday after OPEC’s monthly market report eased worries about waning demand and a US probe into suspected violations of Russian oil sanctions raised concerns about potential supply disruptions.

Brent crude futures rose by USD 1.09, or 1.3%, to settle at USD 82.52 a barrel, while US West Texas Intermediate (WTI) crude futures also gained USD 1.09, or 1.4%, to settle at USD 78.26 a barrel.

In a monthly report, OPEC said oil market fundamentals remained strong and blamed speculators for a drop in prices. OPEC made a slight increase to its 2023 forecast for global oil demand growth and stuck to its relatively high 2024 prediction.

“The OPEC monthly oil market report appeared to push back against demand concerns, referencing overblown negative sentiment around Chinese demand while raising demand growth forecasts for this year and leaving them unchanged for next,” Craig Erlam, senior market analyst at OANDA, said in a note.

Oil prices were also lifted by reports of the US Treasury Department cracking down on Russian oil exports, UBS analyst Giovanni Staunovo said.

Treasury sent notices to ship management companies for information on 100 vessels it suspects of violating Western sanctions on Russian oil, a source who has seen the documents told Reuters.

The US Energy Information Administration (EIA) said last week the country’s crude oil production this year will rise by slightly less than expected and demand will fall. On Monday, the EIA forecast US oil output would decline in December for the second consecutive month.

Weak economic data last week from No. 1 crude importer China fed fears of faltering demand. Chinese refiners asked for less supply for December from Saudi Arabia, the world’s largest exporter.

Still, oil prices may have found a bottom after they slid about 4% last week and recorded their first three-week declining streak since May, said Fawad Razaqzada, an analyst at City Index.

“Given that oil prices have weakened in the last few weeks, Saudi Arabia and Russia will likely continue with their voluntary supply cuts into next year. This should therefore limit the downside potential,” Razaqzada said.

Last week, top oil exporters Saudi Arabia and Russia, part of the group known as OPEC+, confirmed they would continue with additional voluntary oil output cuts until the end of the year as concerns over demand and economic growth continue to drag on crude markets.

The next OPEC+ meeting is scheduled for Nov. 26.

(Reporting by Shariq Khan, Paul Carsten, Yuka Obayashi and Colleen Howe; Editing by David Goodman, Susan Fenton, and David Gregorio)

Bargain or trap? US bank stock outlook hinges on Fed’s path

NEW YORK, Nov 10 – Bargain hunters are swirling around beaten-down shares of US banks, even as skeptical investors say the sector’s problems are likely to persist for some time.

The S&P 500 bank index is down around 11% in 2023, a year that began with the failure of Silicon Valley Bank and several other lenders in the worst banking crisis since 2008. The broader S&P 500, by contrast, is up around 15%.

Bank stocks are at an all-time low compared with the S&P 500 based on relative prices, according to data from BofA Global Research. That tumble has made their valuations attractive to some investors: the sector trades at eight times forward earnings, less than half of the 19.7 valuation of the S&P 500.

“Right now, you can’t say for sure whether the attractive valuations are merely a value trap,” said Quincy Krosby, chief global strategist at LPL Financial, referring to a term describing stocks that are cheap for good reason.

One key factor for bank stocks is whether the Federal Reserve is close to wrapping up a monetary tightening cycle that has brought the highest US interest rates in decades.

Elevated rates allow lenders to charge customers higher interest. But they also increase the allure of short-term bonds and other yield-generating investments over savings accounts, while hurting demand for mortgages and consumer lending.

Few investors believe more rate increases are in store. Yet signs the Fed may keep rates around current levels through most of next year have weighed on bank stocks. Nevertheless, some contrarian investors appear to be moving into the sector: the Financial Select Sector SPDR Fund received net inflows of USD 694.59 million in the week ending on Wednesday, its best weekly showing in more than three months.

This month, analysts at BofA Global Research said investors should “selectively” add exposure to bank stocks in anticipation of an interest rate peak. Most risks to the sector stem from higher rates, they said, including margin pressure due to rising deposit costs and problems with commercial real estate.

Famed investor Bill Gross said last week he believed the sector had hit bottom and added he was holding a number of regional bank stocks, fueling sharp rallies in their shares.

“We think there is a lot of hidden value in banks if you are selective,” said Neville Javeri, a portfolio manager at Allspring Global Investments who is overweight banks relative to the S&P 500 in the portfolios he manages.

Javeri believes larger banks have significantly cut costs and are poised to raise dividends and increase buybacks, helping them weather a period of slower loan growth.

Among stocks recommended by BofA’s analysts are shares of Goldman Sachs and Fifth Third Bancorp.

Investors are awaiting US consumer price data next week, for a glimpse of how the Fed is faring in its fight to keep lowering inflation from last year’s multi-decade highs. A sharper-than-expected fall could bolster the case for the central bank to cut rates sooner.

Many investors and analysts remain pessimistic about bank stocks.

Historically high mortgage rates have weighed on lending. Overall, about 61% of all outstanding mortgages have an interest rate below 4%, according to the Apollo Group, leaving consumers little incentive to refinance or move. The average contract rate on a 30-year fixed-rate mortgage dropped in the week ended Nov. 3 by a quarter percentage point to 7.61%, the lowest in about a month.

Meanwhile, analysts have been cutting growth estimates for financials, which includes not only banks but insurance companies, as the Fed maintains it will keep rates higher for longer. This could hurt mortgage loan growth.

The financial sector is expected to post earnings growth of 6.2% in 2024, nearly half of prior estimates from April that showed 11.4% earnings growth, according to LSEG data.

“You don’t have any certainty that you’ve seen the worst of it and things are getting better,” said Jeff Muhlenkamp, lead portfolio manager at Muhlenkamp & Company.

(Reporting by David Randall; Additional reporting by Bansari Mayur Kamdar; Editing by Ira Iosebashvili and David Gregorio)

US bond funds rack up biggest weekly inflow in three months

Nov 10 – US investors poured a massive sum into bond funds in the seven days leading to Nov. 8 on hopes of a turnaround in Treasury bond prices following the Federal Reserve’s decision to keep interest rates unchanged.

A report from the US Labor Department indicating a slowdown in job growth in October, also lifted bond prices last week. The yields on the benchmark 10-year US Treasury bonds, which move inversely to prices, hit a five-week low of 4.484% last Friday.

According to LSEG data, US bond funds amassed a net USD 3.61 billion worth of inflows during the week, the biggest amount since July 5.

US high yield bond funds saw a significant boost in demand as they received a net USD 6.29 billion, the biggest weekly inflow since mid-April 2020.

Investors also poured about USD 867 million and USD 687 million, respectively into general domestic taxable fixed income, and loan participation funds, while pulling a net 1.92 billion out of US short/intermediate government & treasury funds.

Meanwhile, US equity funds secured USD 1.9 billion, the first weekly inflow in eight weeks.

Small-cap funds were notably in demand as they received USD 1.96 billion, the biggest amount since June 14. Additionally, large-cap funds saw USD 930 million worth of net purchases but mid-, and multi-cap funds had outflows of USD 661 million and USD 396 million.

By sector, tech and financial sector funds attracted USD 1.25 billion and USD 594 million, respectively, while consumer staples had an outflow of USD 500 million on a net basis.

At the same time, US money market received USD 6.47 billion, about a tenth of USD 56.1 billion worth of net purchase in the previous week.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Toby Chopra)

Global equity funds draw massive inflows as rate worries ease

Nov 10 – Global equity funds saw a significant uptick in demand in the week through Nov. 8 as investor sentiment improved following the decision of major central banks to keep policy rates unchanged.

A shift in rate hike expectations and a report from the US Labor Department indicating a slowdown in job growth in October further eased treasury yields, loosening financial conditions.

Investors poured a net USD 5.63 billion into global equity funds during the week, registering their biggest weekly net purchase since Sept. 13.

European, and US equity funds had purchases of USD 2.92 billion and USD 1.9 billion respectively. Asia drew just USD 708 million, the smallest amount since Aug. 16.

The technology sector stood out, securing USD 1.3 billion in inflows, its highest since early July. Financials also saw positive movements with USD 354 million in inflows, but consumer staples experienced outflows of about USD 571 million.

Money market funds continued to attract investors for the third consecutive week, with net inflows of about USD 53.75 billion.

Global bond funds broke a three-week streak of outflows, registering USD 6.73 billion in net purchases.

Reflecting improved risk appetite, high-yield bond funds saw substantial inflows of around USD 6.43 billion, the biggest weekly gain since mid-June 2020.

Government bond funds also experienced net purchases of about USD 2.76 billion. In contrast, global short-term bond funds faced approximately USD 4.44 billion in outflows.

In the commodities sector, precious metal funds continued to attract interest, garnering USD 73 million in net purchases for a second consecutive week. Energy funds also maintained their appeal with USD 54 million in inflows, marking three weeks of consecutive gains.

Emerging market data, encompassing 29,633 funds, indicated a net sell-off of USD 1.73 billion in EM equity funds, extending a 13-week withdrawal streak. In contrast, EM bond funds received USD 592 million – their first weekly inflow in 15 weeks.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Editing by Andrew Heavens)

European shares decline as Powell stamps out rate peak hopes

Nov 10 – European shares fell on Friday, hurt by higher bond yields, with comments from US Federal Reserve chief Jerome Powell pouring cold water on investor optimism over a peak in interest rates and bets around rate cuts.

The pan-European STOXX 600 fell 0.4% by 0810 GMT, although it remained poised for a second weekly gain.

Fed officials including Powell on Thursday expressed uncertainty in their battle against inflation and added that they would tighten policy further if need be.

The comments, perceived as hawkish by markets, follow European Central Bank and Bank of England policymakers also pushing back against expectations around rate cuts.

Richemont CFR.S shed 3.0% after the Swiss luxury group reported weaker-than-expected earnings, while Diageo slid 8% as the Johnnie Walker whisky maker expects organic operating profit growth to decline in its current financial year’s first half.

GN Store Nord jumped 13.1% to top the STOXX 600 following third-quarter results and forecast.

(Reporting by Ankika Biswas in Bengaluru; Editing by Varun H K)

Oil prices settle up as Iraq backs more output cuts from OPEC+

NEW YORK, Nov 10 – Oil prices gained about 2% on Friday as Iraq voiced support for OPEC+’s oil cuts ahead of a meeting in two weeks and as some speculators covered massive short positions ahead of weekend uncertainty.

Still, prices settled with weekly losses of 4%, their third straight weekly decline.

“This was the perfect technical storm. We came into this week with an almost record short position and now we’re seeing some short covering going into the weekend,” said Phil Flynn, an analyst at Price Futures Group.

Flynn noted that in addition to Iraq’s comments, Saudi Arabia and Russia confirmed this week that they would continue oil output cuts through year-end.

In the US, energy firms cut the number of oil rigs operating for a second week in a row to the lowest since January 2022, energy services firm Baker Hughes said. The rig count points to future output.

Brent futures rose USD 1.42, or 1.8%, to settle at USD 81.43 a barrel, while US West Texas Intermediate (WTI) crude rose USD 1.43, or 1.9%, to settle at USD 77.17.

Brent and WTI notched their third straight weekly losses for the first time since May, although both benchmarks exited technically oversold territory.

“Concerns about demand have replaced the fear of production outages related to the Middle East conflict,” analysts at Commerzbank said.

Weak Chinese economic data this week increased worries of faltering demand. Refiners in China, the largest buyer of crude from Saudi Arabia, the world’s largest exporter, asked for less supply for December.

US consumer sentiment fell for a fourth straight month in November and households’ expectations for inflation rose again.

US Federal Reserve Bank of San Francisco President Mary Daly said she is not ready to say yet whether the Fed is done raising rates, echoing Fed Chair Jerome Powell’s comments on Thursday.

Higher interest rates can reduce oil demand by slowing economic growth.

In Britain, the stagnating economy failed to grow in the July-to-September period but did avoid a recession, according to the UK’s Office for National Statistics.

UPCOMING OPEC MEETING

OPEC+, the Organization of the Petroleum Exporting Countries and allies including Russia, will meet on Nov. 26.

Iraq’s oil ministry said Baghdad is committed to the OPEC+ agreement on determining production levels.

Chances Saudi Arabia will extend its output cut into the first quarter of 2024 “is certainly increasing given renewed market concerns about Chinese demand and the broader macro outlook,” RBC Capital Markets analyst Helima Croft said.

Analysts at Capital Economics said OPEC+ might cut supply further if prices continue to fall.

“We are sticking with our forecast of Brent ending both this year and next year at around USD 85 per barrel,” the research firm said in the note.

(Reporting by Scott DiSavino in New York, Ahmad Ghaddar in London, and Sudarshan Varadhan in Singapore; Editing by Nick Macfie, Kirsten Donovan, and David Gregorio)

Some investors see Powell’s hawkish lean as response to looser financial conditions

Nov 10 – A hawkish lean from Federal Reserve Chair Jerome Powell chilled a recent rebound in stocks and bonds, with some investors suggesting the central bank was pushing back against loosening financial conditions.

Speaking at an International Monetary Fund conference on Thursday, Powell said the Fed would “not hesitate” to tighten monetary policy if needed and that the fight to restore price stability “had a long way to go.”

Though the comments did not go much beyond those given after the Fed’s Oct. 31 – Nov. 1 monetary policy meeting, some investors believe Powell’s tone was more hawkish compared with those earlier remarks, which contributed to last week’s powerful rebound in stocks and Treasuries.

By contrast, the S&P 500 fell 0.8% on Thursday, snapping an eight-day winning streak that was its longest in two years. Yields on the benchmark 10-year Treasury, which move inversely to bond prices, rose 12 basis points, their largest one-day gain in three weeks.

“Powell seemed to be course-correcting some of the dovish comments from last week and circling back to the idea that the Fed is prepared to raise rates again if they need to,” said Charlie Ripley, senior investment strategist for Allianz Investment Management.

Some investors said Powell may have been leaning against a recent loosening of financial conditions that has come as yields have tumbled in recent weeks. The benchmark 10-year Treasury yield has fallen nearly 40 basis points to 4.63%, from a 16-year high of just above 5%.

Evidence of the dynamic between yields and financial conditions – factors that reflect the availability of funding in an economy – was on display in last week’s 0.5% decline in the Goldman Sachs Financial Conditions Index, its sixth-biggest weekly drop since 1990.

Average rates on 30-year mortgages, which move together with Treasury yields, fell 25 basis points last week, the largest weekly tumble in nearly 16 months. Meanwhile, the S&P 500 is up 5.5% from its October lows.

“The noticeable drop in yields from last week may have caused some caution at the FOMC, which then led Chair Powell … talking up yields again,” said Spencer Hakimian, CEO of Tolou Capital Management, a New York-based macro hedge fund.

“If their concept is to have tighter financial conditions, they can’t really let those yields go down. They need them to stay restrictive in order to not actually have to raise rates,” he said.

Sonal Desai, chief investment officer of Franklin Templeton Fixed Income, echoed that sentiment, saying the Fed was trying to calm “an exuberance” it unintentionally created in the markets.

“The rally of the markets both in equity and fixed income unwound the financial conditions tightening to a large degree,” Desai said. “This is Powell pushing back against markets trying to put into his mouth the words ‘mission accomplished.'”

At the same time, the weakest auction for 30-year Treasuries since August 2011 also hit government bond prices. Yields on the 30-year Treasury recently stood at 4.77%, from a low of 4.6% earlier this week.

“The rates market was still somewhat jittery after the auction so higher yields were the path of least resistance,” said Vassili Serebriakov, a foreign exchange strategist at UBS.

Investors are awaiting US consumer price data next week, which could show how the Fed is faring in its fight to keep lowering inflation from last year’s multi-decade highs.

“Chairman Powell issued a warning to investors too giddy on the prospect of rate cuts next year,” said Jeffrey Roach, chief economist for LPL Financial, in a note. However, “next week’s inflation data should provide some salve for the markets as headline inflation will likely be soft from easing energy prices.”

(Reporting Davide Barbuscia and David Randall; Additional reporting by Saqib Iqbal Ahmed and Karen Brettell; Writing by Ira Iosebashvili; Editing by Sam Holmes)

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