US Treasury curve briefly inverts as recession worries mount

LONDON, July 5 (Reuters) – A key part of the U.S. Treasury yield curve briefly inverted for the first time since mid-June on Tuesday, reflecting investor concern that hefty interest-rate hikes could tip the U.S. economy into a recession.

Though money markets are nearly unanimous in pricing an aggressive 75 bps rate rise from the U.S. Federal Reserve later this month, expectations of where rates would peak in mid-2023 have cooled considerably to 3.2% from above 4% in early June.

Nomura economists expect the US economy to tip into recession from the final quarter of 2022.

Recession angst was also reflected in the Treasury market.

The gap between two and 10-year government bonds, a closely-watched indicator of recession risk, briefly inverted for the first time in almost three weeks. It narrowed to -0.40 basis points briefly, before widening back to around 2 bps.

Still, that spread has collapsed from nearly 31 bps in early June.

Ten-year U.S. Treasury yields rose to as high as 2.978%, versus Friday’s close of 2.90%, playing catch up with a broader rise in European government debt yields after cash trading resumed after Monday’s July 4 holiday.

But as the London session gathered momentum, 10-year yields fell back and were last down around 2 bps on the day at 2.89%. Short-dated yields remained higher.

Inflation expectations from the bond market have also tumbled. Breakevens for 5-year maturities held around 2.63%, just above an October 2021 low of 2.59% hit last week.

(Reporting by Saikat Chatterjee; Editing by Dhara Ranasinghe)

When going gets rough traders can rely on two currencies

July 5 (Reuters) – During periods of uncertainty when risk aversion is evident as it is today there are two currencies traders can rely on as stores of safety, the US dollar and China’s yuan.

The dollar as the world’s reserve and most liquid currency is an obvious port of call and with an 18-percent gain unfolding since taper talk emerged last year unsettling financial markets, it’s clearly a profitable way to ride out the storm.

China’s yuan which is only tradable for most in its offshore guise (CNH) is not an obvious contender as a safe asset but has proved to be one.

The offshore yuan is liquid and a big rally during the COVID-19 pandemic which saw a record high traded in March this year merits attention. A fresh bout of uncertainty has spurred another rise and with a massive current account to support it, and China loosening policy to support the economy when others are forced to tighten to fight inflation, curbing their economies, the yuan could be a wise place to park some cash, spreading risk away from the dollar.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own; editing by David Evans)

Philippines sells $635 million of reissued 2026 T-bond

MANILA, July 5 (Reuters) – Following are the results of the Philippine Bureau of the Treasury’s (BTr) auction of reissued 2026 T-bond on Tuesday:

* BTr fully awards 35 billion pesos ($635.55 million) offer

* Tenders total 56.236 billion pesos

* Average yield 5.908%

* Bonds were originally issued in February, 2019

* Details on the BTr’s website www.treasury.gov.ph

($1 = 55.0700 Philippine pesos)

(Reporting by Karen Lema)

Philippine inflation near 4-year high, cements prospect of more rate hikes

MANILA, July 5 (Reuters) – Philippine inflation surged to the highest level in nearly four years in June, cementing expectations for more interest rate hikes and increasing the prospect of the central bank acting more aggressively to temper price pressures.

The consumer price index rose 6.1% in June from a year, marking the third consecutive month inflation has been above the official 2%-4% target band, driven mainly by higher transport and utilities’ costs, as well as food prices, the statistics agency said on Tuesday.

The Philippine Statistics Authority has yet to release core inflation figures since shifting to the new 2018 base year in determining changes in consumer prices.

The headline figure outpaced the 5.9% median forecast in a Reuters poll, but was within the 5.7%-6.5% range projected by the central bank for the month.

Inflation in the first half of the year averaged 4.4%.

The Bangko Sentral ng Pilipinas (BSP) may consider bigger interest rate hikes to support a weak Philippine peso and contain inflation, though will not be obliged to match policy tightening by the US Federal Reserve, Governor Felipe Medalla said last week.

Speaking ahead of the June inflation data, Robert Dan Roces, an economist at Security Bank in Manila, said the BSP’s Monetary Board “might consider a one-time, preemptive 50 basis points policy rate hike when it meets on Aug. 18 if inflation’s upside risks remain persistent.”

The BSP has tightened its monetary policy to curb inflation pressures with back-to-back rate hikes of 25 basis points in May and June.

A weakening peso could also help push up inflation, while also curbing consumer purchasing power.

The narrowing gap between Philippines and US interest rates has weighed on the peso, which is trading near a 17-year low against the US dollar.

(Reporting by Enrico Dela Cruz and Karen Lema; Editing by Ed Davies)

Improved risk sentiment lifts euro, sterling

LONDON, July 4 (Reuters) – The euro and sterling rose on Monday against safe-haven currencies, supported by improved global risk sentiment in a quiet trading session due to a holiday in the United States.

European stocks and Britain’s FTSE share index rallied on Monday, helped by gains in oil and gas companies. US markets are closed for Independence Day.

Sterling and the euro gained some ground against the US dollar, the Japanese yen and the Swiss franc.

The single currency rose 0.2% to USD 1.0440 against the dollar, but stayed barely above May’s five-year trough of USD 1.0349, while sterling rose 0.4% to USD 1.2143 after hitting a two-week low of USD 1.1976 on Friday.

“Quiet trading to start the week is seeing the US dollar weaken against most major currencies as it unwinds Friday’s gains,” said Shaun Osborne, chief FX strategist at Scotiabank.

Reports that the White House will announce an easing of some Chinese tariffs later this week in an attempt to dampen elevated inflation helped inject some optimism back into markets, Osborne added.

But amid fears of a global recession, the euro remained near a five-year low against the dollar.

The war in Ukraine and its economic fallout, in particular soaring food and energy inflation, has been a major drag on the euro, which has weakened 8% against the dollar this year. The difference between the European Central Bank and the US Federal Reserve response to higher inflation has also weighed on the euro.

Data on Friday showed euro zone inflation surging to another record, adding to the case for the ECB to raise interest rates this month for the first time in a decade.

Jeremy Stretch, head of G10 FX strategy at CIBC said he expected headwinds on the euro to persist as the ECB is set to hike rates on July 21 by “a mere 25 basis point”.

“ECB action remains moderate when compared with a 75bps Fed hike,” he said. “Beyond ECB monetary policy discussion, the primary European Union risk variable relates to the energy sector.”

Safe-haven demand has kept the dollar elevated even if markets have scaled back some of their US rate hike expectations. The market 0#FF: is pricing in around an 85% chance of another hike of 75 basis points this month and rates at 3.25% to 3.5% by year-end, before cuts in 2023.

The US dollar index =USD eased 0.03% to 105.02, not far below last month’s two-decade high of 105.790.

Looking ahead to the rest of the week, investors are awaiting publication of minutes from last month’s Fed meeting on Wednesday and US employment data on Friday.

Australia’s central bank will meet on Tuesday and markets have priced in a 40 basis point (bp) rise in interest rates. The Aussie may not catch much of a boost if a hike of that size, or thereabouts, is delivered.

(Reporting by Joice Alves. Editing by Jane Merriman, Chizu Nomiyama and Emelia Sithole-Matarise)

Marcos vows to boost Philippines’ grains output to avert food crisis

MANILA, July 4 (Reuters) – Philippine President Ferdinand Marcos Jr vowed on Monday to do what it takes to boost his country’s rice and corn production, seeking to reduce reliance on imports and avoid being hit hard by a food crisis now looming across the world.

Marcos, who was sworn in as president last week and has appointed himself agriculture minister, said the Philippines – the world’s second-biggest rice importer – was now at a disadvantageous position over its food supply.

“When we look around the world, everyone is preparing for it,” Marcos said during a meeting with senior agriculture officials, referring to the food crisis.

“So we should really pay close attention to what we can do.”

Marcos comes to power at a critical time, with inflation at its highest in more than three years and as the world faces a tightening food supply, resulting from the conflict between major cereals exporters Russia and Ukraine.

A transcript of the meeting provided by the presidential mentioned no specific remedial measures or targets, but Marcos said the government would ensure affordability of food prices.

To ensure long-term food sufficiency and affordability, Marcos reiterated a campaign promise to “reconstruct our value chain”, within his six-year term, to lessen dependence on food imports.

He also sought a review of a 2019 Rice Tariffication Law, which opened the Philippine door wider to imports by removing the annual quota on purchases and limiting the government’s role in rice trade to ensuring supply during emergencies.

(Reporting by Enrico Dela Cruz; Editing by Martin Petty)

Gold edges lower as July rate hikes loom

July 4 (Reuters) – Gold prices fell on Monday, hovering near the key USD 1,800 level, as the prospect of higher global interest rates amid rising price pressure and a firmer dollar weighed on bullion’s appeal.

Spot gold fell 0.2% to USD 1,806.60 per ounce by 0916 GMT after touching a five-month low of USD 1,783.50 on Friday.

US gold futures rose 0.3% to USD 1,807.50.

The US dollar held close to a two-decade high touched last month, pressuring gold by making it expensive for those holding other currencies.

“Gold bulls are stuck in a quagmire of aggressive Fed policy actions, as the prospects of higher US rates erode support for the precious metal,” said Han Tan, chief market analyst at Exinity.

The US Federal Reserve is expected to deliver another 75-basis-point (bps) interest rate hike this month.

The European Central Bank too is widely predicted to follow its global peers. Euro zone inflation hit yet another record high in June as price pressures broadened.

“Markets have yet to fully price in a 75 bps hike at this month’s FOMC meeting. If policymakers are forced to turn more aggressive in the face of unwavering inflation, that could spell another leg down for gold prices,” Tan added.

Investors are also awaiting publication of minutes from last month’s Fed meeting on Wednesday and US employment data on Friday.

“In this environment of ever rising interest rates, it is hard to see gold making significant gains but if the precious metal can hold above USD 1,800 an ounce, then it would demonstrate that there remains significant underlying support for gold,” Rupert Rowling, market analyst at Kinesis Money, said.

Spot silver fell 0.1% to USD 19.86 per ounce, trading near its lowest in two years.

Platinum slipped 0.8% to USD 882.25, while palladium XPD= was little changed at USD 1,960.29.

US markets are closed for the Independence Day holiday.

(Reporting by Arundhati Sarkar in Bengaluru; Editing by Jacqueline Wong)

Gold slips as interest rate expectations sap appeal

July 4 (Reuters) – Gold fell on Monday as prospects of higher interest rates dimmed appeal for the non-yielding asset, but a softer dollar helped bullion to cling above the USD 1,800 support level.

Spot gold fell 0.2% to USD 1,807.40 an ounce by 1311 GMT, having touched a five-month low of USD 1,783.50 on Friday.

US gold futures rose 0.4% to USD 1,809.00.

The US dollar was down 0.2% but held close to a two-decade high reached last month.

A weaker dollar makes gold less expensive for those holding other currencies.

“Gold bulls are stuck in a quagmire of aggressive Fed policy actions, as the prospects of higher US rates erode support for the precious metal,” said Han Tan, chief market analyst at Exinity.

The US Federal Reserve is expected to deliver another 75 basis point (bps) interest rate increase this month.

The European Central Bank, too, is widely expected to follow its global peers. Euro zone inflation hit yet another record high in June as price pressures broadened.

Investors are also awaiting publication of minutes from last month’s Fed meeting on Wednesday and US employment data on Friday.

“In this environment of ever-rising interest rates, it is hard to see gold making significant gains. But if the precious metal can hold above USD 1,800 an ounce, then it would demonstrate that there remains significant underlying support,” said Rupert Rowling, market analyst at Kinesis Money.

Spot silver fell 0.3% to USD 19.81 an ounce, trading near its lowest in two years.

Spot platinum was down 0.7% at USD 882.75, while palladium fell by 1.1% to USD 1,939.83.

US markets are closed for the Independence Day holiday.

(Reporting by Arundhati Sarkar in Bengaluru; Editing by Jacqueline Wong and David Goodman)

Oil could hit $380 if Russia slashes output over price cap, J.P.Morgan says

July 4 (Reuters) – Brent prices could soar to a “stratospheric” USD 380 a barrel in “the most extreme scenario” of Russia slashing oil production by 5 million barrels per day (bpd) in retaliation to a price cap being considered by the Group of Seven, analysts at J.P.Morgan said in a note dated July 1.

G7 economic powers agreed last week to explore imposing a ban on transporting Russian oil that has been sold above a certain price, aiming to limit Moscow’s ability to fund its invasion of Ukraine, which Moscow describes as a “special operation”.

“A USD 50-60 per barrel price cap would likely serve the G7 goals of reducing oil revenues for Russia while assuring barrels continue to flow,” the bank said.

“The most obvious and likely risk” is Russia not cooperating and retaliating by reducing exports of oil, it said, adding that Moscow can cut output by up to 5 million bpd “without excessively hurting its economic interest”.

“Given the high level of stress in the oil market, a cut of 3.0 million bpd could cause global Brent price to jump to USD 190/bbl, while the worst-case scenario, a 5 million bpd cut could drive oil price to a stratospheric USD 380/bbl,” J.P.Morgan said.

Russian Deputy Prime Minister Alexander Novak said last week that attempts to limit the price of Russian oil could lead to imbalance in the market and push prices higher.

JP Morgan also saw alterative scenarios where China and India do not cooperate with G7 on the price cap, or where Russia fully re-routes exports from the west to the east but loses pricing power.

(Reporting by Deep Kaushik Vakil; editing by Jason Neely)

Cosseted bank bondholders need to feel more pain

LONDON, July 4 (Reuters Breakingviews) – Bank bondholders need to feel more pain. Credit Suisse’s (CSGN) haste this month to repay a hybrid bond at the first opportunity looks odd given the elevated cost of replacing it. There is a rational explanation. The problem is it highlights broader flaws in the USD 212 billion market for bank capital securities.

June 16 was a good day for holders of the Swiss lender’s USD 1.5 billion hybrid. The so-called Additional Tier 1 bond had been trading at 95% of face value, reflecting the risk of the bank leaving it outstanding rather than exercising its right to pay it back early. When the bank chose instead to redeem, the bond’s price recovered. Credit Suisse fared less well. To maintain its capital levels, the struggling lender had to issue a new bond with a 9.75% coupon, some 115 basis points above the likely interest rate on the old one, implying an extra cost of some USD 17 million a year.

After the 2008 crisis, regulators tried to make hybrids, which count towards lenders’ Tier 1 capital ratios, truly equity-like. That meant giving them triggers that convert into shares and coupons that can be cancelled. Structures to incentivize early repayment, such as coupons that crank up when bonds aren’t redeemed early, were also banned. Yet hybrids still contain “call options” on early repayment, and regulators give some leeway on their use. While a handful of lenders like Banco Santander (SAN) have taken a hard-nosed approach, most European banks still pay off Tier 1 bonds on the call date even if it costs more to replace them.

The obvious advantage is cheaper funding. Yet the presumption of redemption also creates risks: troubled banks may end up paying higher interest rates to replace retiring debt, or markets might get spooked when banks choose not to redeem. Credit Suisse also had some unique motives, such as the desire to be rid of liabilities with now-redundant Libor-based coupons.

The coming months may stiffen lenders’ resolve. Recession fears mean the cost of issuing hybrids is rising, giving other banks like UniCredit (CRDI) the dilemma of extending debt or replacing it at higher cost, CreditSights reckons.

Regulators could clear up the uncertainty by insisting, for example, that banks only redeem debt if they can refinance at cheaper rates. They also need to look at hybrids’ other equity-like features, to ensure for example that bonds can defer coupons or be turned into equity before the bank actually goes bust. A rethink that makes life tougher for bondholders is needed.

CONTEXT NEWS

Credit Suisse said on June 16 that it planned to redeem a USD 1.5 billion Additional Tier 1 bond. The security carried a 7.125% coupon, which would have reset to around 8.6% after its call date in July, according to CreditSights. The redeemed bond was replaced with a new issue with a 9.75% yield.

Banks have issued 202 billion euros of Additional Tier 1 securities, according to CreditSights data. The securities count towards lenders’ Tier 1 ratios due to their loss-absorbing features. These include the right to convert them into equity or to defer coupons, as well as their lower-ranking status and potentially permanent maturity.

(By Neil Unmack; Editing by Ed Cropley and Oliver Taslic)

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