Hedge fund demand for US Treasuries seen rising amid higher bond supply

NEW YORK, Sept 21 – Hedge funds will likely become increasingly important buyers of US Treasuries, providing liquidity in the world’s biggest bond market at a time of rising investor concerns over supply-demand dynamics, several market participants said on Thursday.

Hedge funds’ short positions in some Treasuries futures, contracts for the purchase and sale of bonds for future delivery, have recently hit record highs due to their involvement in so-called basis trades, which take advantage of the premium of futures contracts over the price of the underlying bonds.

The trade, which contributed to severe disruptions in the Treasuries market when it was unwound rapidly in March 2020, has recently drawn attention from economists at the Federal Reserve as well as from the Bank for International Settlements. The risk, they have warned, is that large basis positions could once again exacerbate vulnerabilities in the US bond market, which is a linchpin of the world’s financial system.

Some bond market participants, however, say hedge funds using the strategy provide crucial demand for Treasuries at a time when the government is issuing more debt while the Fed – which used to be a big buyer in the market – has been reducing its bond holdings since June last year.

“It’s necessary for those participants to come in because of the funding demands of the issuers, the issuers here being (President) Joe Biden and (Treasury) Secretary (Janet) Yellen,” said Jason Granet, chief investment officer at BNY Mellon, during a panel at the ISDA derivatives trading forum in New York on Thursday. “These basis positions with these transformations are going to be a part of the equation because it’s a necessary evil to get the capital to meet the demand.”

The Treasury announced this summer it intended to increase coupon auction sizes in the third quarter and that additional gradual increases will likely be necessary in coming quarters.

Higher supply comes as liquidity in Treasuries has been problematic for most of last year, partially due to rising volatility spurred by the Fed’s aggressive rate hiking cycle.

The Fed is also progressing with “quantitative tightening” – a reversal of the massive central bank bond purchases undertaken to support markets as the coronavirus hit in 2020.

Mark Wendland, chief operating officer and partner at DRW Holdings, which is trading the cash-future basis in Treasuries, said the trade has an essential function as it supports liquidity in the market, despite some regulators’ concerns regarding leveraged players.

“The importance of the basis trade cannot be underestimated particularly given supply-demand imbalances in Treasuries,” he told Reuters on the sidelines of the forum, referring to factors such as higher government bond issuance and lower demand from the Federal Reserve as a buyer.

Cash-futures basis trades – typically the domain of macro hedge funds with relative value strategies – consist of selling a futures contract, buying Treasuries deliverables into that contract with repurchase agreement (repo) funding, and delivering them at contract expiry.

Leverage levels were very high in Treasuries during previous episodes of market stress such as March 2020 or September 2019, when dwindling bank reserves sent the cost of overnight loans as high as 10%, forcing the Fed to intervene.

But Richard Chambers, global head of repo trading and global co-head of short macro trading at Goldman Sachs, told the trading forum on Thursday that the repo market was now more efficient.

“We will have more levered investors buying Treasuries into 2024 and so demand for leverage in Treasuries will increase,” he said.

(Reporting by Davide Barbuscia, Gertrude Chavez-Dreyfuss, Carolina Mandl, and Laura Matthews in New York; Editing by Matthew Lewis)

Dollar eases after Fed-spurred rise; yen stronger ahead of BOJ

NEW YORK, Sept 21 – The US dollar eased against a basket of currencies on Thursday, but remained near a six-month high, a day after the Federal Reserve signaled US monetary policy will remain restrictive for longer.

The Japanese yen strengthened against the greenback before Friday’s Bank of Japan policy announcement, while the pound and the Swiss franc slipped after the British and Swiss central banks kept rates unchanged.

The Fed held interest rates steady at the 5.25%-5.50% range, in line with market expectations on Wednesday, but it signaled that its officials increasingly believe hawkish policy can succeed in lowering inflation without wrecking the economy or leading to large job losses.

Along with another possible rate hike this year, the Fed’s updated projections show significantly tighter rates through 2024 than previously expected.

“Dollar bulls absolutely got what they wanted yesterday,” Helen Given, an FX trader at Monex USA.

“Though Powell didn’t go as far as to say he expects a soft landing, it’s pretty clear between the dot plot and the Fed’s updated growth forecasts the central bank has convinced markets that is where the US economy may be headed,” Given said.

“Of course, this contrasts fairly directly with guidance from the ECB and BoE, facing much more dire economic situations,” she said.

The US dollar index, which measures the currency against a basket of rivals, was 0.10% lower at 105.33, after rising as high as 105.74, its strongest since March.

The yen was up 0.58% at 147.46 per dollar. With the yen still near a 10-month low against the greenback attention remains fixed on the possibility of the Japanese government intervening in foreign exchange markets to prop up the currency.

Japan will not rule out any options in addressing excess volatility in currency markets, the government’s top spokesperson said on Thursday, issuing a fresh warning against the yen’s decline toward the psychologically important 150-mark per dollar.

“Traders are repositioning before both the meeting tomorrow and CPI releases,” Monex’s Given said.

The BOJ will end its negative interest rate policy next year, the majority of economists said in
a Reuters poll, as the market has begun to envisage the demise of its ultra-easy monetary settings.

“While we are unlikely to get a rate hike tonight we may just hear some comments that imply one is to come,” Brad Bechtel, global head of FX at Jefferies, said in a note.

The pound fell to its lowest since March after the Bank of England held interest rates steady on Thursday, following a cooler-than-expected inflation report the previous day.

Thursday marked the first time since December 2021 that the BoE did not raise rates at its monetary policy meeting, a halt to a run of 14 consecutive rate hikes.

The pound was 0.41% lower at USD 1.22935.

Earlier, the Swiss franc dropped after the Swiss National Bank unexpectedly held rates steady, marking the first time the central bank has not hiked since March 2022, although it kept options open for further rate rises.

Meanwhile, Sweden’s Riksbank and Norway’s central bank both raised rates by 25 basis points, in line with expectations.

The euro was up 0.18% against the Swedish crown and about flat against the Norwegian crown following the respective decisions.

In cryptocurrencies, bitcoin was down about 2.0% on the day at USD 26,593.

(Reporting by Saqib Iqbal Ahmed; Editing by Sam Holmes, Shri Navaratnam, Sharon Singleton, and Richard Chang)

Oil settles lower as Russia fuel export ban boosts, rate hikes weigh

Sept 21 – Oil prices settled lower after choppy trading on Thursday, rising as much as USD 1 a barrel after a Russian ban on fuel exports snatched the focus from Western economic headwinds that had pushed prices down USD 1 a barrel early in the session.

Brent futures for November delivery settled down 23 cents to USD 93.30 a barrel, while US West Texas Intermediate crude (WTI) settled down 3 cents to USD 89.63. Both benchmarks had risen and fallen more than USD 1 earlier on Thursday.

Russia temporarily banned exports of gasoline and diesel to all countries outside a circle of four ex-Soviet states with immediate effect to stabilize the domestic fuel market, the government said on Thursday.

The shortfall, which will force Russia’s fuel buyers to shop elsewhere, caused heating oil futures Hoc1 to rise by nearly 5% on Thursday.

“As diesel and gasoil likely advance to new highs, they will be positioned to provide some upward pull on the crude markets,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

The Fed on Wednesday maintained interest rates, but stiffened its hawkish stance, projecting a quarter-percentage-point increase to 5.50-5.75% by year-end.

That could dampen economic growth and overall fuel demand. The US dollar surged to its highest since early March, making oil and other commodities more expensive for buyers using other currencies.

US unemployment benefit claims dropped to an eight-month low last week, the US Labor Department reported. John Kilduff, partner at Again Capital LLC in New York, called this another factor that would encourage high interest rates.

“The Fed stance and a strong labor market have driven equities and commodities lower, pressuring oil,” said Kilduff.

The Bank of England mirrored the Fed and held interest rates on Thursday after a long run of hikes, but said it was not taking a recent fall in inflation for granted.

Norway’s central bank raised its benchmark interest rate on Thursday and, in a surprise move, said it would probably hike again in December.

Oil prices remained supported by concern about tight supply globally entering the fourth quarter. US crude stocks at Cushing, the WTI delivery hub, are at their lowest since July 2022 as the Organization of the Petroleum Exporting Countries and allies maintain production cuts.

(Reporting by Paul Carsten and Natalie Grover in London and Laura Sanicola and Trixie Yap; Editing by Sonali Paul, Jane Merriman, Alexandra Hudson, David Gregorio, and Barbara Lewis)

Gold slides as Fed reinforces higher-for-longer rates outlook

Sept 21 – Gold extended its decline for a third consecutive on Thursday, weighed by the surge in the US dollar and US bond yields after the Federal Reserve hardened its hawkish posture on interest rates.

Spot gold shed 0.5% to USD 1,920.10 per ounce by 1149 GMT, having briefly touched its highest since Sept. 1 before closing lower in the previous session.

US gold futures eased 1.3% to USD 1,940.80.

The Fed held interest rates steady on Wednesday, but its updated quarterly projections showed that rates may be lifted once more this year and kept tight through 2024.

“Gold traders took to heart the Fed’s higher-for-longer messaging… forcing bullion bulls to temper their enthusiasm,” said Exinity chief market analyst Han Tan.

The dollar climbed over a six-month peak, while benchmark 10-year Treasuries yields sat atop a 16-year high, weighing on greenback-priced bullion that bears no interest.

But “spot gold has so far only witnessed limited post-FOMC declines, as bullion bulls are apparently clinging on to Fed Chair Powell’s words that a US rate cut ‘will come’ eventually,” Tan added.

While markets penciled in a 45% chance of another rate hike this year, they also bet on roughly a 40% chance that the Fed will ease in the first half of 2024, according to the CME FedWatch tool.

“The precious metal will probably need to rely on some slowing momentum in Treasury yields in order to post gains of any significance to the upside,” said KCM Trade Chief Market analyst Tim Waterer.

On investors’ radar later in the day will be the Bank of England’s policy decision on whether it is halting a run of interest rate hikes that stretches back to December 2021.

Silver fell 0.3% to USD 23.17 per ounce and platinum slipped 1.2% to USD 917.48. Palladium dropped 2.1% to USD 1,247.18, set for its worst session since Aug. 30.

(Reporting by Deep Vakil and Swati Verma in Bengaluru; Editing by Janane Venkatraman and Krishna Chandra Eluri)

Fed’s hawkish stance spooks investors, though some say peak rates near

NEW YORK, Sept 21 – The Federal Reserve’s plans for a prolonged period of elevated interest rates could continue pressuring stocks and bonds in coming months, though some investors doubt the central bank will stick to its guns.

The US central bank left interest rates unchanged on Wednesday, in line with market expectations. But policymakers bolstered their hawkish stance with a further rate increase projected by the end of the year and monetary policy forecasts kept significantly tighter through 2024 than previously expected.

Broadly speaking, higher rates for longer could be an unwelcome turn of events for stocks and bonds. The benchmark US Treasury yield, which moves inversely to bond prices, already stands at its highest since 2007 after surging in recent months, and could continue climbing if rates remained high.

Elevated yields on Treasuries – seen as a risk-free alternative to equities because they are backed by the US government – are also a headwind to stocks. The S&P 500 is up 15% year-to-date but has struggled to advance from late July’s high as the surge in yields accelerated.

The S&P 500 lost 0.94% on Wednesday, while the yield on two-year Treasuries, which reflect interest rate expectations, hit 17-year highs.

“There’s now a wider range of potential outcomes for when rate cuts are going to come, and that sets up the potential for increased volatility as we head into year-end,” said Josh Jamner, investment strategy analyst at Clearbridge Investments.

Still, it appeared that at least some part of the market was doubtful the Fed would stand firm on keeping rates as high as it projected – even though betting against the US central bank’s hawkishness has mostly been a losing wager since policymakers began raising borrowing costs in March 2022.

Futures tied to the Fed’s policy rate late Wednesday showed traders were betting the central bank would ease monetary policy by a total of nearly 60 basis points next year, bringing interest rates to about 4.8%. That compares to the 5.1% the Fed penciled into its updated quarterly projections.

“It looks as though the Fed is trying to send as hawkish a signal as it possibly can. It’s just a question of whether the markets will listen to them,” said Gennadiy Goldberg, head of US rates strategy at TD Securities USA. “If the economy starts to soften, I don’t think these dot-plot projections will actually hold up.”

HOW RESILIENT?

The key question, many investors believe, is to what degree the 525 basis points in rate hikes the Fed has delivered since March 2022 to battle inflation have filtered through the economy, and whether US growth will hold up if rates stay around current levels for most of 2024.

Fed Chair Jerome Powell said a “solid” economy would allow the central bank to keep additional pressure on financial conditions with much less of a cost to growth and the labor market than in previous US inflation battles.

Still, investors are contending with a series of near-term risks that have chipped away at the view of an economic “soft landing,” where the Fed is able to gradually ease inflation without causing a recession.

These include higher energy prices, an auto workers strike launched last week, the possibility of a government shutdown, and an end to the moratorium on student loan repayments. Signs of wobbling growth could bolster the case for the central bank to cut rates far sooner than it had projected.

“Inflation is going in the right direction, but … there’s a lot of headwinds” to growth, said David Norris, head of US credit at TwentyFour Asset Management.

John Madziyire, senior portfolio manager and head of US Treasuries and TIPS at Vanguard Fixed Income Group, believes bond yields are near their peak and look “super attractive”.

“I don’t think there’s much room for yields to go higher, so as a long-term investor … you should be adding more duration risk at these levels and use any selloff to actually add duration risk,” he said.

Of course, betting on a rate peak has backfired on investors several times in the past year, as stronger-than-expected economic growth forced markets to recalibrate views for a 2023 recession and push back expectations for how soon the central bank would cut borrowing costs.

But for Norris, of TwentyFour Asset Management, the longer rates stay high, the greater the chance that a soft landing narrative doesn’t play out.

“If they keep monetary policy as restrictive as it is … the chances of a harder landing become higher,” he said.

(Reporting by Davide Barbuscia and David Randall; Additional reporting by Herbert Lash and Lewis Krauskopf; Editing by Ira Iosebashvili and Stephen Coates)

Central bank bonanza, yen intervention watch

Sept 21 – It’s all about global interest rates for Asia on Thursday.

Three monetary policy decisions in Asia and a finely balanced call from the Bank of England will give Asian markets their steer, as investors digest the Federal Reserve’s policy decision, revised forecasts and guidance on Wednesday.

The central banks of Indonesia, the Philippines and Taiwan are all widely expected to keep key lending rates on hold at 5.75%, 6.25% and 1.88%, respectively, so investors will be looking to policy statements for clues on future moves.

The surprise fall in UK inflation last month puts the BoE decision on a knife edge – Goldman Sachs, Deutsche and Nomura all changed their BoE calls – and the pullback in rate hike expectations contributed to the fall in global bond yields earlier on Wednesday.

But that was before the Fed.

Punchy upward revisions to US policymakers’ median rate forecasts for the next couple of years tipped markets the other way – the dollar rebounded sharply, US Treasury yields spiked to new multi-year highs, the yield curve flattened and stocks collapsed.

US crude oil fell 1%, its biggest fall in a month – some relief for investors, who will also note that this was the first time in a month oil has fallen two days in a row.

For Asian markets, one of the most significant consequences of the Fed’s revisions is the dollar’s rise, most notably against the yen. The dollar hit an 11-month high above 148 yen, which Japanese policymakers will be paying close attention to.

The Bank of Japan meets on Friday, and a growing number of analysts were already expecting a signal that ultra-loose policy would soon end. A renewed slide in the exchange rate could raise those expectations even further.

What’s more, the yen sliding deeper into territory that prompted record yen-buying intervention from Japanese authorities late last year is bound to intensify speculation that a repeat is on the cards.

In that light, it is worth noting that Japan’s intervention on Sept. 22 last year was a day after the FOMC decision and revised forecasts. Will lightning strike twice?

The Asia and Pacific regional economic calendar on Thursday also includes second quarter GDP data from New Zealand – seen rebounding to +0.5% on a quarter-on-quarter basis and almost halving to 1.2% on an annual basis, according to a Reuters poll – and Hong Kong inflation for August.

Here are key developments that could provide more direction to markets on Thursday:

– Indonesia central bank meeting

– Philippines central bank meeting

– Bank of England policy decision

(By Jamie McGeever; Editing by Josie Kao)

Two-year yields hit 17-year highs after hawkish Fed

NEW YORK, Sept 20 – Interest rate sensitive two-year Treasury yields hit 17-year highs on Wednesday after the Federal Reserve held interest rates steady but stiffened its hawkish stance for future policy.

The US central bank projected a further rate increase by the end of the year and expected monetary policy to be significantly tighter through 2024 than previously thought.

“It looks as though the Fed is trying to send as hawkish a signal as it possibly can,” said Gennadiy Goldberg, head of US rates strategy at TD Securities in New York. “It’s just a question of how the data evolves from here.”

The two-year yields reached 5.152%, the highest since July 2006, and were last at 5.135%. Five-year yields hit 4.547%, the highest since August 2007, and were last 4.522%.

Benchmark 10-year note yields jumped to 4.359% and were last 4.347%. They reached 4.371% on Tuesday, the highest since November 2007.

The inversion in the yield curve between two-year and 10-year notes deepened to minus 80 basis points.

Fed funds futures traders are still pricing in only a partial chance of a further rate hike, with a 29% probability in November and 43% chance by December, according to the CME Group’s FedWatch Tool.

As they did in June, Fed policymakers at the median still see the central bank’s benchmark overnight interest rate peaking this year in the 5.50% to 5.75% range, just a quarter of a percentage point above the current range.

But from there the Fed’s updated quarterly projections show rates falling only half a percentage point in 2024 compared to the full percentage point of cuts anticipated at the meeting in June.

“The decrease in the number of cuts in 2024 is one of the more telling changes this month,” said Andrew Patterson, senior economist at Vanguard. “It means that the Fed is increasingly confident that they can pull off a soft landing and that the economy can withstand higher rates for longer.”

Analysts this week said that higher oil prices have helped to drive yields higher on concerns that inflation will remain elevated.

Fed Chairman Jerome Powell, however, disagreed on Wednesday, saying instead that higher yields reflect market views of better growth and the impact of higher Treasury bond supply.

Sept. 20 Wednesday 3:30 PM New York / 1930 GMT

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.32	5.4824	0.005
Six-month bills	5.3	5.5367	0.000
Two-year note	99-192/256	5.1351	0.026
Three-year note	99-124/256	4.8123	0.017
Five-year note	99-90/256	4.5223	0.000
Seven-year note	98-8/256	4.4574	-0.012
10-year note	96-60/256	4.3467	-0.020
20-year bond	97-64/256	4.5869	-0.031
30-year bond	95-144/256	4.3928	-0.035

(Reporting by Karen Brettell; Additional reporting by Herb Lash; Editing by Chizu Nomiyama, Will Dunham, and Josie Kao)

US recap: Fed revives cautious dollar bulls, but data to dominate

Sept 20 – The dollar index was little changed on the day on Wednesday after fighting back from earlier losses as the Fed’s hawkish hold bolstered sentiment, but it struggled to advance further with markets convinced that there’s little the US central bank can do to lift rate expectations from here.

The Fed dot plots kept one more rate hike this year favored, while the previous 100bp of rate cuts in the median 2024 dot plot was trimmed to 50 bps, but overall the message once again was a state of data dependence.

Chair Jerome Powell said policy is already restrictive, and though the Fed has a lot of ground to cover before inflation gets back to target, the full effects of to-date tightening have yet to be felt.

EUR/USD plunged after the Fed announcement, sliding from near Wednesday’s 1.0737 high to new seession lows as 2-year Treasury yields shed early losses and rose to new 2023 and post-GFC highs.

A close below May’s major swing lows at 1.0635 is needed to trigger a further squeeze of what’s left of spec EUR/USD longs.

The dollar index is still working off overbought pressures from its 6% rise to major resistance since July’s lows.

Sterling was trading down 0.34% on the day. Earlier it had fallen to its lowest since May following below-forecast CPI, then rebounded ahead of the Fed.

Sterling would need to close above the 200-day moving average at 1.2434 to weaken the downtrend.

USD/JPY held modestly higher after the Fed events, and briefly breached the 148 hurdle in earlier trading, with the focus now on Thursday’s US data and Friday’s BoJ and Japan CPI report.

Some potential tension between US and Japanese officials regarding when Japanese FX intervention to support the yen might be justified may raise the bar for intervention and put more of the burden on BoJ policy normalization to underpin the yen.

Aussie and other high-beta currencies shed pre-Fed risk-on gains that stemmed from hopes the major central banks’ tightening cycles are either at or very close to cresting.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Dollar index on verge of forming bullish ‘golden cross’ – BofA

NEW YORK, Sept 20 – The US dollar’s recent rally has put it on track to form a golden cross – a bullish technical trading chart pattern – affirming an upbeat near-term view on the currency, according to a BofA Global Research note published on Wednesday.

A golden cross occurs when a short-term moving average crosses above a long-term moving average.

The dollar index’s 200-day moving average of 103.036 is close to being topped by the 50-day moving average at 103.001, according to LSEG data. The index measures the currency against a basket of six rivals.

“This supports our 4Q23 technical view of a supported and potentially stronger USD,” BofA Global Research technical strategist Paul Ciana said in a note published on Wednesday.

The note was published before the release of the much anticipated Federal Reserve interest rate decision on Wednesday. The dollar index was down 0.47% at 104.707 ahead of the decision at 2 p.m. ET (1800 GMT).

The dollar index rose for its ninth straight week last week, its longest winning streak in nearly a decade, as a resilient US economy – combined with weaker growth abroad – has fueled a rebound.

The last time a golden cross was formed in the index, it went on to rise another 24% before peaking, according to a Reuters analysis.

Ciana, however, noted that the index’s recent strong rally presented a risk to the bullish signal.

Such a move now would lift the dollar index to over 129, far above its 2022 high of 114.78.

“A signal when price is near the highs may make it difficult to perform vs a signal that occurs just after a timely dip,” he said.

(Reporting by Saqib Iqbal Ahmed; Editing by Sharon Singleton)

Gold trims gains after Fed strikes hawkish tone

Sept 20 – Gold slightly pared gains on Wednesday after the US Federal Reserve held interest rates unchanged but struck a hawkish stance for future policy.

Spot gold was up 0.6% at USD 1,942.19 per ounce at 2:41 p.m. EDT (1841 GMT) after rising as much as 0.9% earlier in the session. US gold futures settled 0.7% higher at USD 1,967.10.

The US central bank held interest rates steady but stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.

Fed Chair Jerome Powell said officials will proceed “meeting by meeting” on rates and “we are prepared to raise rates further if appropriate.”

Soon after the decision, traders reduced bets on interest-rate cuts next year.

“Gold and silver have backed off as the Fed’s dot plot was more hawkish than expected. Metals were priced for a more dovish Fed,” said Tai Wong, a New York-based independent metals trader.

While gold is considered a hedge against rising inflation, higher rates boost competing Treasury yields, dulling bullion’s appeal.

Standard Chartered analyst Suki Cooper said “we expect gold’s upside risk to be capped in the near term and upward price momentum may not be sustained until there is increasing market confidence that global and US interest rates are set to move lower, and the dollar softens.”

The dollar pared losses and benchmark 10-year yields jumped after the Fed verdict.

“What is still keeping the gold price supported is solid demand from central banks, which continue to diversify into gold,” said UBS analyst Giovanni Staunovo.

Silver rose 1% to USD 23.45 per ounce, platinum fell 0.7% to USD 932.61 and palladium gained 1.1% to USD 1,273.70.

(Reporting by Ashitha Shivaprasad and Harshit Verma in Bengaluru; Editing by Mark Potter and Shweta Agarwal)

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