Yet another deluge of Treasury bonds thanks to the US Treasury happened on Wednesday, but with each new auction investors seem less and less happy with the rapidly rising bond supply. Trying to shift future consumption towards current one through tax cuts, the government was forced to increase the speed of borrowing, but expectations of a hawkish Fed increased the borrowing costs as well, making it pricier for government to raise money through debt.

The appetite for fresh batch of debt was tepid as shown by the yield to maturity which rose to 2.821%, the highest level since May 2008. Higher YTM says that the market is willing to pay less to receive fixed payments in the future. The lower the YTM, the more attractive is fixed payment security.

Among the other auction details, it is also worth taking note of the ratio between direct, indirect bids and dealers. Foreign buyers can not directly interact with the Treasury, so they do this through intermediary banks, thus creating indirect demand. At yesterday’s auction, the percentage of indirect buyers was 46.3%, with an average value of 42.7% in August while lower than the average for 6 months value of 48.1%. Declining share of indirect investors can be explained by the fact that dollars are now needed everywhere, including emerging markets, which have been throwing US Treasury bonds to get some money. They are not yet ready to return dollars to their homeland in exchange for debt offer from the White House. Dealers purchased 43.0%, while direct buyers took only 10.7%, in accordance with historical values.

The auction took place during the phase of intraday bond market decline: yesterday, the yield of 10-year bonds gradually advanced to 2.97%, almost simultaneously with the yield on 2-year securities, which rose as well. The spread between the two practically did not change, being at 0.23%.

Today, it’s worth paying attention to 10-YR bill auction among willing masses, with a total volume of $23 billion. As the placements through the past two months show, the market does demonstrate a tendency for risk-aversion.

Oil

Against the backdrop of news about the interruption of production and refinery works on the east coast and sanctions against Iranian oil, WTI jumped above 69 per barrel, drawing optimism from the API data.

API

The change in crude oil reserves -8.636M against the forecast of -1.75M.

Cushing + 2.122M against expectations of 900K.

The reserves of gasoline increased by 5.8M barrels.

Distillates decreased by 1.165M barrels.

It is obvious that the reduction in supply due to interruptions in the Mexican Gulf and the high demand for fuel due to the economic recovery, cause such a high pace of decline in oil from storage facilities. In turn, less stocks – less opportunity for American producers to influence the market – more control options for OPEC – rising prices. Market is currently trading in backwardation meaning that current supply is lower than it will be in the future.

 

France and South Korea, in turn, cave in under US pressure and abandon Iranian oil, forcing the latter to reduce supplies. Also, the news slipped on the market that Russia and OPEC are ready to sign a new oil agreement. It seems for prices that the upside path is opening.

In an interview with BBC the head of BoE Mark Carney, said that China’s financial system now represents one of the main risks to financial stability. The reason is the risk of repeating same mistakes that led to the 2008 crisis in the US, that is, the accumulation of high household debt, a high percentage of bad debts in Chinese banks due to inefficient lending, including costly and uneconomic infrastructure projects.

The Chinese yuan continues to cede territory to the dollar, this morning the pair almost reached the level of 6.88, but the dollar could not fix the growth. The Chinese authorities still prefer to take a passive position, responding to threats of imposing tariffs by retaliatory measures, thus trying to minimize the damage from the confrontation. Interim US elections in November are now one of the main hopes of the Chinese government, in particular, the seizure of the House of Representatives by democrats and obstruction of measures aimed at exacerbating a trade dispute with China.

Please note that this material is provided for informational purposes only and should not be considered as investment advice. Trading in the financial markets is very risky.

 

 

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