Winning bidders at the Treasury’s auction of $35 billion in five-year notes were looking at losses an hour later after the Federal Reserve said it sees further improvement in the labor market.
Yields on the securities climbed as high as 1.625 percent in what’s known as when-issued trading following the release of the central bank’s policy statement at the conclusion of a two-day meeting at 2 p.m. in Washington. The securities were sold at a yield of 1.567 percent, compared with an average forecast of 1.555 percent in a survey of seven of the Fed’s 22 primary dealers, which are obligated to bid at the sale.
“We are underwater in the fives,” said Brian Edmonds, the head of interest-rates trading at primary dealer Cantor Fitzgerald LP in New York. “It was a more hawkish FOMC statement, certainly leaving the door open to a Fed tightening as early as mid-2015.” Demand for the notes was already the lowest in five years with bidders hesitant to purchase the debt at auction before the release of the Fed statement. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the least since July 2009.
The Federal Open Market Committee said it sees further improvement in the labor market as it ended an asset-purchase program that has added $1.66 trillion to its balance sheet. While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Bidding Metrics
The Treasury’s debt sale was rated a ‘2’ by five primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding. Two would denote a poor auction, three an average sale and four would indicate a good offering, according to a survey of the banks and brokerage firms.
“There was a little bit too much going on today,” said David Robin, managing director and interest-rate strategist in New York at Newedge USA LLC. “People bid defensively.”
Indirect bidders, a class of investors that includes foreign central banks, bought 47.8 percent of the notes compared to 50.3 percent at the September sale and the average of 47.1 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, were awarded 10.5 percent, compared to 8.8 percent at the last sale and an average of 14 percent at the past 10 sales.
Five-year notes have returned 3.2 percent this year, versus a gain of 5.1 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The five-year securities lost 2.4 percent in 2013, while Treasuries overall fell 3.4 percent. The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.
Treasuries Decline as Fed Cites Job Gains in Ending Bond Buying
Treasuries dropped, with benchmark 10-year yields rising to three-week high, as the Federal Reserve ended its third round of bond-buying, citing further improvement in the labor market.
U.S. debt fell as the Fed downplayed concern global economic weakness may restrain U.S. growth, while retaining its commitment to keep interest rates low for a “considerable time” as it ended a two-day meeting. The chances of a Fed interest-rate increase by its September 2015 meeting rose to 51 percent, from 41 percent yesterday, according to futures data. The Treasury’s sale of $35 billion of five-year notes drew the lowest demand since 2009. “They were more upbeat on the economy and the employment situation than people thought,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. There was “no mention of effects of global weakness.”
The benchmark 10-year note yield rose four basis points, or 0.04 percentage point, to 2.34 percent as of 2:46 p.m. New York time, according to Bloomberg Bond Trader data. The yield reached 2.36 percent, the highest level since Oct. 8. The price of the 2.375 percent note maturing in August 2024 fell 10/32, or $3.13 per $1,000 face amount, to 100 11/32.
The difference between yields on two-year and 30-year debt narrowed to 258 basis points, the lowest level on a closing basis since Oct. 7.
Market Outlook
Eighty percent of economists in a Bloomberg survey predicted the Fed would continue saying it’s appropriate to hold the target interest rate near zero for a “considerable time.” The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.
“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources. The U.S. may have added 225,000 jobs this month, according to a Bloomberg News survey of economists before the Nov. 7 Labor Department report. The unemployment rate is projected to be unchanged at 5.9 percent, the lowest level since July 2008.
“The market is selling off post the FOMC with the market focusing on the more optimistic outlook for the labor market rather than the retention of the ’considerable time’ language,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “It doesn’t move the needle regarding the pace of Fed hikes or when the first hike will come.”
Global Economy
Fed officials had cited a cooling global economy and declining inflation as risks to the outlook for the U.S, which along with conflicts in Ukraine and the Mideast, had sparked global market turbulence.
“There was no mention of the weakness of global economic activity globally, underscoring the idea that the U.S. will remain strong in the face of global weakness,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “The report was a surprise and decidedly different than what the market was expecting, especially given the last Fed minutes.”
While more than $3 trillion of debt purchases since 2008 have helped the U.S. recover from its worst recession in seven decades, bond-market indicators for long-term inflation, growth and funding costs are all lower now than they were at the end of the central bank’s first two rounds of quantitative easing. The Fed’s assets have ballooned to $4.5 trillion from less than $1 trillion in 2008.
Inflation Measure
The Fed’s five-year five-year forward break-even inflation rate was 2.19 percent as of Oct. 24, below the 3.08 percent level at the end of October 2009, when the first round of bond purchases ended. At the end of June 2011 when QE2 ended, the measure was 3.11 percent. Reports since September have shown inflation has decelerated. Prices as measured by the personal consumption expenditures index rose 1.5 percent from a year earlier in August, down from a 1.7 percent gain in May. The inflation gauge has fallen short of the Fed’s 2 percent target for 28 consecutive months.
The Fed purchased $300 billion in Treasuries in its first round of buying the securities from March 2009 to October 2009 to reduce unemployment and lower consumer borrowing costs. In its second round of QE, the Fed purchased $600 billion of Treasuries from November 2010 to June 2011. It purchased $790 billion of Treasuries in its third round of QE from January 2013 to this month in a bid to strengthen economic growth.
Operation Twist
The Fed also conducted short-term debt sales and long-term purchases through “Operation Twist” in October 2011 through December 2012 as it extended the maturity of its portfolio.
The five-year auction yield was 1.567 percent, compared with a forecast of 1.555 percent, according to the average forecast in a Bloomberg News survey of seven of the Fed’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the lowest since July 2009 and versus an average of 2.74 at the past 10 auctions.
“It’s pretty weak,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, of the primary dealers that are obligated to bid at the auctions. “It’s hard to get excited about the five-year going into the Fed.” The sale was rated a ‘2’ by five of the Fed’s primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding.
The Treasury also sold $15 billion of two-year floating-rate notes at a high discount margin of 0.053 percent, compared to 0.041 percent last month. The securities drew bids for 3.58 times the amount available, versus 4.45 last month. The U.S. auctioned $29 billion of two-year debt yesterday, and it plans to conclude this week’s sales with $29 billion of seven-year securities tomorrow.
McGraw Hill Takes Charge for Possible CMBS Settlement
McGraw Hill Financial Inc. (MHFI) said it’s negotiating a possible settlement of government investigations into how its Standard & Poor’s unit graded commercial mortgage-backed securities and recorded a $60 million charge to cover the costs.
The charge pared the company’s third-quarter net income to $188 million, a 17.5 percent decline from a year earlier, the company said today in a statement. Earnings excluding certain items including a separate $46 million charge partially tied to staff buyouts were $1.02 a share, exceeding the average estimate of 94 cents in a Bloomberg survey of eight analysts.
The owner of the world’s biggest credit rater is booking the costs as it negotiates a potential settlement amid probes by the U.S. Securities and Exchange Commission as well as states attorneys general in New York and Massachusetts into S&P’s handling of securities tied to loans on properties such as malls and office towers. Shares rose to a record after the company posted a 10 percent sales increase to $1.26 billion. “Revenue growth is primarily the result of strong market demand for ratings associated with bond issuance, bank loans and new entities,” Doug Peterson, McGraw Hill’s chief executive officer, said on a conference call with analysts.
Sales from grading debt deals rose 12 percent to $604 million, the company said. The increase came even as corporate-bond issuance in the U.S. fell to $325 billion in the three months ended Sept. 30, from $390 billion a year earlier, according to data compiled by Bloomberg.
Shares Rise
McGraw Hill rose 2.1 percent to $87.52 in New York trading and has gained 11.9 percent this year, trailing competitor Moody’s Corp.’s 24.4 percent rally and compares with a 7.2 percent increase in the Standard & Poor’s 500 Index.
S&P is in “active discussions to resolve matters pending” before the SEC and related investigations in New York and Massachusetts, according to the statement. The amount of the charge may change because a definitive settlement hasn’t been reached, the company said.
New York Attorney General Eric Schneiderman is investigating S&P to determine whether it failed to follow its own methodology in rating the debt, two people with knowledge of the matter said this month. S&P said in July it received a notice from the SEC that the regulator may seek an enforcement action related to the six CMBS ratings in 2011. Massachusetts Attorney General Martha Coakley also is looking into how the firm rated such securities, people familiar with the matter said last year.
The company lowered its annual forecast for adjusted diluted earnings per share to a range of $3.78 to $3.83 from a previous outlook of $3.80 to $3.90. The new guidance excludes results from McGraw Hill Construction, which has been reclassified as a discontinued operation, it said. McGraw Hill agreed to sell the unit to private-equity firm Symphony Technology Group for $320 million, according to a Sept. 22 statement.
source: Bloomberg
Yields on the securities climbed as high as 1.625 percent in what’s known as when-issued trading following the release of the central bank’s policy statement at the conclusion of a two-day meeting at 2 p.m. in Washington. The securities were sold at a yield of 1.567 percent, compared with an average forecast of 1.555 percent in a survey of seven of the Fed’s 22 primary dealers, which are obligated to bid at the sale.
“We are underwater in the fives,” said Brian Edmonds, the head of interest-rates trading at primary dealer Cantor Fitzgerald LP in New York. “It was a more hawkish FOMC statement, certainly leaving the door open to a Fed tightening as early as mid-2015.” Demand for the notes was already the lowest in five years with bidders hesitant to purchase the debt at auction before the release of the Fed statement. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the least since July 2009.
The Federal Open Market Committee said it sees further improvement in the labor market as it ended an asset-purchase program that has added $1.66 trillion to its balance sheet. While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”
Bidding Metrics
The Treasury’s debt sale was rated a ‘2’ by five primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding. Two would denote a poor auction, three an average sale and four would indicate a good offering, according to a survey of the banks and brokerage firms.
“There was a little bit too much going on today,” said David Robin, managing director and interest-rate strategist in New York at Newedge USA LLC. “People bid defensively.”
Indirect bidders, a class of investors that includes foreign central banks, bought 47.8 percent of the notes compared to 50.3 percent at the September sale and the average of 47.1 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, were awarded 10.5 percent, compared to 8.8 percent at the last sale and an average of 14 percent at the past 10 sales.
Five-year notes have returned 3.2 percent this year, versus a gain of 5.1 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The five-year securities lost 2.4 percent in 2013, while Treasuries overall fell 3.4 percent. The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.
Treasuries Decline as Fed Cites Job Gains in Ending Bond Buying
Treasuries dropped, with benchmark 10-year yields rising to three-week high, as the Federal Reserve ended its third round of bond-buying, citing further improvement in the labor market.
U.S. debt fell as the Fed downplayed concern global economic weakness may restrain U.S. growth, while retaining its commitment to keep interest rates low for a “considerable time” as it ended a two-day meeting. The chances of a Fed interest-rate increase by its September 2015 meeting rose to 51 percent, from 41 percent yesterday, according to futures data. The Treasury’s sale of $35 billion of five-year notes drew the lowest demand since 2009. “They were more upbeat on the economy and the employment situation than people thought,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. There was “no mention of effects of global weakness.”
The benchmark 10-year note yield rose four basis points, or 0.04 percentage point, to 2.34 percent as of 2:46 p.m. New York time, according to Bloomberg Bond Trader data. The yield reached 2.36 percent, the highest level since Oct. 8. The price of the 2.375 percent note maturing in August 2024 fell 10/32, or $3.13 per $1,000 face amount, to 100 11/32.
The difference between yields on two-year and 30-year debt narrowed to 258 basis points, the lowest level on a closing basis since Oct. 7.
Market Outlook
Eighty percent of economists in a Bloomberg survey predicted the Fed would continue saying it’s appropriate to hold the target interest rate near zero for a “considerable time.” The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.
“Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate,” the Federal Open Market Committee said in a statement in Washington. “A range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” the panel said, modifying earlier language that referred to “significant underutilization” of labor resources. The U.S. may have added 225,000 jobs this month, according to a Bloomberg News survey of economists before the Nov. 7 Labor Department report. The unemployment rate is projected to be unchanged at 5.9 percent, the lowest level since July 2008.
“The market is selling off post the FOMC with the market focusing on the more optimistic outlook for the labor market rather than the retention of the ’considerable time’ language,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “It doesn’t move the needle regarding the pace of Fed hikes or when the first hike will come.”
Global Economy
Fed officials had cited a cooling global economy and declining inflation as risks to the outlook for the U.S, which along with conflicts in Ukraine and the Mideast, had sparked global market turbulence.
“There was no mention of the weakness of global economic activity globally, underscoring the idea that the U.S. will remain strong in the face of global weakness,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “The report was a surprise and decidedly different than what the market was expecting, especially given the last Fed minutes.”
While more than $3 trillion of debt purchases since 2008 have helped the U.S. recover from its worst recession in seven decades, bond-market indicators for long-term inflation, growth and funding costs are all lower now than they were at the end of the central bank’s first two rounds of quantitative easing. The Fed’s assets have ballooned to $4.5 trillion from less than $1 trillion in 2008.
Inflation Measure
The Fed’s five-year five-year forward break-even inflation rate was 2.19 percent as of Oct. 24, below the 3.08 percent level at the end of October 2009, when the first round of bond purchases ended. At the end of June 2011 when QE2 ended, the measure was 3.11 percent. Reports since September have shown inflation has decelerated. Prices as measured by the personal consumption expenditures index rose 1.5 percent from a year earlier in August, down from a 1.7 percent gain in May. The inflation gauge has fallen short of the Fed’s 2 percent target for 28 consecutive months.
The Fed purchased $300 billion in Treasuries in its first round of buying the securities from March 2009 to October 2009 to reduce unemployment and lower consumer borrowing costs. In its second round of QE, the Fed purchased $600 billion of Treasuries from November 2010 to June 2011. It purchased $790 billion of Treasuries in its third round of QE from January 2013 to this month in a bid to strengthen economic growth.
Operation Twist
The Fed also conducted short-term debt sales and long-term purchases through “Operation Twist” in October 2011 through December 2012 as it extended the maturity of its portfolio.
The five-year auction yield was 1.567 percent, compared with a forecast of 1.555 percent, according to the average forecast in a Bloomberg News survey of seven of the Fed’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the lowest since July 2009 and versus an average of 2.74 at the past 10 auctions.
“It’s pretty weak,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, of the primary dealers that are obligated to bid at the auctions. “It’s hard to get excited about the five-year going into the Fed.” The sale was rated a ‘2’ by five of the Fed’s primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding.
The Treasury also sold $15 billion of two-year floating-rate notes at a high discount margin of 0.053 percent, compared to 0.041 percent last month. The securities drew bids for 3.58 times the amount available, versus 4.45 last month. The U.S. auctioned $29 billion of two-year debt yesterday, and it plans to conclude this week’s sales with $29 billion of seven-year securities tomorrow.
McGraw Hill Takes Charge for Possible CMBS Settlement
McGraw Hill Financial Inc. (MHFI) said it’s negotiating a possible settlement of government investigations into how its Standard & Poor’s unit graded commercial mortgage-backed securities and recorded a $60 million charge to cover the costs.
The charge pared the company’s third-quarter net income to $188 million, a 17.5 percent decline from a year earlier, the company said today in a statement. Earnings excluding certain items including a separate $46 million charge partially tied to staff buyouts were $1.02 a share, exceeding the average estimate of 94 cents in a Bloomberg survey of eight analysts.
The owner of the world’s biggest credit rater is booking the costs as it negotiates a potential settlement amid probes by the U.S. Securities and Exchange Commission as well as states attorneys general in New York and Massachusetts into S&P’s handling of securities tied to loans on properties such as malls and office towers. Shares rose to a record after the company posted a 10 percent sales increase to $1.26 billion. “Revenue growth is primarily the result of strong market demand for ratings associated with bond issuance, bank loans and new entities,” Doug Peterson, McGraw Hill’s chief executive officer, said on a conference call with analysts.
Sales from grading debt deals rose 12 percent to $604 million, the company said. The increase came even as corporate-bond issuance in the U.S. fell to $325 billion in the three months ended Sept. 30, from $390 billion a year earlier, according to data compiled by Bloomberg.
Shares Rise
McGraw Hill rose 2.1 percent to $87.52 in New York trading and has gained 11.9 percent this year, trailing competitor Moody’s Corp.’s 24.4 percent rally and compares with a 7.2 percent increase in the Standard & Poor’s 500 Index.
S&P is in “active discussions to resolve matters pending” before the SEC and related investigations in New York and Massachusetts, according to the statement. The amount of the charge may change because a definitive settlement hasn’t been reached, the company said.
New York Attorney General Eric Schneiderman is investigating S&P to determine whether it failed to follow its own methodology in rating the debt, two people with knowledge of the matter said this month. S&P said in July it received a notice from the SEC that the regulator may seek an enforcement action related to the six CMBS ratings in 2011. Massachusetts Attorney General Martha Coakley also is looking into how the firm rated such securities, people familiar with the matter said last year.
The company lowered its annual forecast for adjusted diluted earnings per share to a range of $3.78 to $3.83 from a previous outlook of $3.80 to $3.90. The new guidance excludes results from McGraw Hill Construction, which has been reclassified as a discontinued operation, it said. McGraw Hill agreed to sell the unit to private-equity firm Symphony Technology Group for $320 million, according to a Sept. 22 statement.
source: Bloomberg