The Daily Prophet: Century Bonds, Earnings and Costly Cookies
(Bloomberg View) -- Treasury Secretary Steven Mnuchin single-handily caused the government's borrowing costs to rise after he said the issuance of ultra-long maturity bonds could "absolutely" make sense for the U.S. The comments sparked a sell-off in 30-year bonds as investors suddenly realized that those maturities could soon have a lot more competition.
This is not the first time the Trump administration has floated the idea of issuing debt due in as long as 100 years, but the topic seems to be gathering steam after the Treasury Department, in a routine questionnaire released last month, asked the 23 primary dealers what it should consider when structuring a bond with a maturity longer than three decades, such as 40, 50 or 100 years. While on the surface it would make sense to borrow for as long as possible to lock in interest rates near historic lows, there's been no shortage of pessimists on Wall Street, who prize the predictable nature of the government's borrowing programs.
Goldman Sachs says interest in an ultra-long bond appears "largely tied" to funding an infrastructure program that may not materialize. NatWest strategists say the U.S. may end up having to pay a higher concession to investors relative to shorter maturity debt if the Treasury Department is perceived as "opportunistically introducing or abandoning issues" to take advantage of fluctuations in rates. Issuing longer-dated bonds “is something we’re considering at Treasury," Mnuchin said in an interview on Bloomberg Television on Monday in Los Angeles. ‘‘We think that it’s something that could absolutely make sense for us at Treasury.”
CORPORATE PROFITS SOAR. NOW THE BAD NEWS
The Nasdaq Composite Index closed at another record high, thanks in part to strong profits. The good news for stock investors is that halfway through first-quarter earnings season, companies in the benchmark S&P 500 Index are on pace to deliver 14 percent profit growth overall, above initial forecasts of a 9.1 percent increase. Companies are beating estimates by the most since 2009, according to Bianco Research. But there's some hesitation about the rest of 2017, according to the analysts at Bloomberg Intelligence. Analysts and companies in aggregate are generally not budging on forward estimates, despite the strong first quarter, the BI analysts found. This is another busy week for earnings, with another 122 members of the S&P 500 scheduled to report results, including Apple, Facebook, AIG, Merck and Pfizer. Bianco Research notes that, historically, the longer a company waits to report results, the worse their earnings usually are. Good news is rushed out early in earnings season while companies usually sit on poor results, the said.
OIL FALLS FURTHER BELOW $50
One reason earnings have been so strong is because energy companies have benefited from a rebound in the price of oil to above $50 a barrel. The recovery in energy company earnings "will flatten out rapidly over the next few quarters unless crude prices move significantly higher," According to Bianco Research. The problem, though, is that oil is retreating again. Crude fell further below $50 today as Libyan production rebounded, the number of rigs climbed in the U.S. and Saudi Arabia cut prices to Asian customers, according to Bloomberg News' Mark Shenk. Libya is pumping oil at the highest rate since December 2014, Mustafa Sanalla, chairman of the National Oil Corp. said. American drillers increased the number of active oil rigs to the highest level in two years last week, according to Baker Hughes Saudi Arabia, the world’s largest crude exporter, cut pricing for June exports to Asia as it fights to maintain market share in the region.
CALM MARKETS GETTING EVEN CALMER
Here's more fuel for the "markets are too complacent" crowd. Bank of America Merrill Lynch's Market Risk index continues to drop, falling to its lowest level since late 2014. The gauge is a measure of expected future price swings implied by options markets tied to global equities, rates, currencies and commodities. For this index, levels less than zero indicate less stress than is typically normal, while levels greater than zero point to the opposite. The gauge has been falling since just after the U.S. elections, a period that coincided with a generally positive tone in markets. Despite rising geopolitical tensions, the outlook for global economic growth has been on the rise, and options markets seem to agree with that optimism. Two weeks ago, the Washington-based International Monetary Fund raised its forecast for global growth to 3.5 percent this year, up 0.1 percentage point from January.
THAT'S SOME EXPENSIVE DOUGH
Wheat prices headed for record gains in Chicago on Monday as the U.S. winter crop faced substantial losses from snow and high winds that slammed into four Midwest states including Kansas, the top grower, according to Bloomberg News' Jen Skerritt, Jeff Wilson and Megan Durisin. More than 12 inches (30 centimeters) of snow fell on ripening wheat in parts of Kansas, Colorado, Oklahoma and Nebraska in the past 24 hours, according to David Streit, the senior lead forecaster at Commodity Weather Group. It will take several days before the damage can be assessed accurately as the snow melts, but early estimates suggest losses could exceed 50 million bushels, according to Pira Energy. For hard red winter wheat, a variety of the grain used to make bread, futures for July delivery surged 6.6 percent to $4.6625 centers per bushel on the Chicago Board of Trade. The contract rose as much 6.7 percent, a record increase. July futures for soft red winter wheat, which is used to make cookies and cake, jumped as much as 5.6 percent to $4.5625. Corn prices also rose in active trading.
The major automobile companies will report their April sales Tuesday and the results are likely to get more scrutiny than usual given the handwringing over a rise in subprime car loans. The analysts at Bloomberg Intelligence said volume declines are projected at each U.S. automaker amid an increase in incentives. General Motors is projected to post its first drop since January. First-quarter earnings show new-vehicle transaction prices remain high enough to support incentives near 10 percent of sticker prices, according to the BI analysts. Jeff Brown, the Chief Executive Officer of Ally Financial, which is a major auto lender, told Bloomberg News last week that he he’s more concerned about bulging car-dealer lots than overdue auto loans. “Inventory lots across the U.S. are very full,” Brown said Thursday. “We’re watching how disciplined manufacturers are.”
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Robert Burgess is editor of Bloomberg Prophets.
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