The Daily Prophet: It's Going to Be a Long Year for Bond Traders
(Bloomberg View) -- It’s not even March yet, and bond investors probably can’t wait for the year to be over. The Bloomberg Barclays U.S. Aggregate Bond Index has fallen 2.12 percent since the end of December through Feb. 16, and there’s little on the horizon to suggest a rebound anytime soon.
U.S. Treasuries fell across the board Tuesday as the government began flooding the market with supply to rebuild its cash balance and start paying for the recently enacted tax cuts. Investors were asked to digest $179 billion in Treasury bills and two-year notes in a matter of hours, resulting in the highest borrowing rates for the government since 2008, according to Bloomberg News’s Alexandra Harris.While that’s good news for savers who have suffered with near-zero rates since the financial crisis, it’s not so good for borrowers. Overall, the government is forecast to at least double its debt sales this year to more than $1 trillion-- the most since 2010. In a research note, the strategists at Goldman Sachs wrote that they now see 10-year Treasury yields, which were at 2.89 percent on Tuesday, rising to 3.25 percent, up from their prior forecast of 3 percent.
And since Treasuries are the global benchmark, the firm also boosted its yield forecasts for German bunds, U.K. gilts and Japanese government bonds. The nonpartisan Committee for a Responsible Federal Budget said it expects the U.S. budget deficit to swell to $1.2 trillion in fiscal 2019 alone after the Trump administration enacted tax cuts late last year that will reduce federal revenue by $1.5 trillion over a decade. The auctions continue Wednesday, with the sale of $35 billion in five-year notes followed by the sale of $29 billion of seven-year notes on Thursday.
JOINED AT THE HIP
Stocks struggled for much of the day Tuesday, with the S&P 500 Index ending lower for the first time since Feb. 8. The standard response of stock bulls to rising bond yields is that it shouldn’t matter because higher rates are a byproduct of a stronger economy, and equities do well when the economy is strengthening. At least one influential Wall Streeter who doesn’t buy that theory: Guggenheim Partners Chief Investment Officer Scott Minerd. In a research note Tuesday, Minerd, whose department oversaw about $250 billion in assets as of Dec. 31, noted that the bond and stock markets will act as governors on each other going forward, in that rising borrowing cost will drive down stock prices, and lower stock prices will cause bond yields to stop rising and to fall. About 57 percent of investors surveyed by Strategas Research Partners expect the S&P 500 to drop below this year’s intraday low of 2,533 reached on Feb. 9, while the rest say the market has bottomed for the year after a two-week selloff sent the index to its first 10 percent correction since 2016, reports Bloomberg News’s Lu Wang. The poll, conducted Feb. 16, covered roughly 500 institutional investors.
MORGAN STANLEY’S NOT IMPRESSED
The Bloomberg Dollar Spot Index rose as much as 7.05 percent in its biggest rally since Feb. 2, with the gains credited to traders covering short positions, which creates inherent demand. Whatever the reason, the foreign-exchange strategists at Morgan Stanley are not impressed. In a research report, they wrote that evidence of increasingly strong global economic performance is likely to benefit currencies other than the U.S. dollar. As a result, they now expect the longer-term downward trajectory of the greenback “to start sooner and be more pronounced.” Although the fiscal stimulus of the 1980s coincided with a stronger dollar, this time is different. That’s because back then, deficits were easily financed as the global economy had significant capacity reserves and limited investment demand, so there was an excess of available capital, according to the firm. Now, the booming global economy and rising capital demand mean the U.S. will face stiffer international competition for capital to finance the deficit, which means it will have to offer higher interest rates or a cheaper currency rate. Morgan Stanley sees the dollar weakening to $1.30 per euro by year-end, compared with its old forecast of $1.17.
OIL TAKES A BREATHER
Crude’s rebound from its lowest levels of the year slowed considerably Tuesday as U.S. Deputy Energy Secretary Dan Brouillette said America’s oil output is on track for “phenomenal” growth this year. “I don’t see it as a blip,” he said in an interview with Bloomberg News in London when asked about those who doubt shale oil will continue growing. “We are optimistic about 2019 and 2020, too.” The remarks countered comments by OPEC leaders about shrinking the worldwide crude glut and a post-2018 extension of output limits, according to Bloomberg News’s Jessica Summers. Although the Organization of Petroleum Exporting Countries and allied producers have succeeded in whittling away most of the glut that triggered the worst market collapse in decades, American explorers have been pumping crude at record rates. “Prices are vulnerable to the downside over the coming months,” said Giovanni Staunovo, an analyst at UBS Group. “Though the market likes OPEC and its allies’ show of unity, we still need to see how U.S. shale companies will react on higher prices and eventually offset all the efforts of OPEC and others to reduce inventories.”
BITCOIN MAKES A COMEBACK
The digital currency has about doubled in price from its low of the year on Feb. 6, rising to as high as $11,730 on Tuesday. Although it’s still far away from its peak of almost $20,000 in December, the rebound suggests predictions of its demise were premature. The latest leg higher comes as South Korean regulators signal they will actively support what they called “normal” cryptocurrency trading. In a further shift from earlier rhetoric -- which hinted at an outright ban of cryptocurrency exchanges -- Choe Heungsik, governor of South Korea’s Financial Supervisory Service, told reporters he wants to see normalized trading of digital assets, and said the FSS is making efforts to do that, according to Bloomberg News’s Eric Lam. Cryptocurrencies plunged through much of January amid mounting concern regulators would crack down on the burgeoning industry, but they’ve found an apparent bottom after some well-received Senate testimony from U.S. officials and a more conciliatory tone in South Korea.
TEA LEAVES
What exactly did the Federal Reserve mean when, at Chair Janet Yellen’s last meeting on Jan. 30-31, the central bank pledged twice to make “further gradual adjustments” in interest rates -- as opposed to just “gradual adjustments” at the prior gathering? Investors and economists may get some clues Wednesday when the minutes of the closed-door meeting are released, according to Bloomberg News’s Steve Matthews. One possibility is that it was an indication that policy makers were debating raising rates by more than the three moves officials had penciled in for 2018, Matthews reports. Another idea is that policy makers may have discussed increasing their estimate of the neutral rate that neither speeds up nor slows down the economy in light of new fiscal stimulus.
DON'T MISS
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The Rules of the Game Are Changing for Investors: Lena Komileva
Here’s Who Really Matters at the Bank of Japan: Daniel Moss
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
To contact the editor responsible for this story: Tracy Walsh at twalsh67@bloomberg.net.
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