Treasuries rallied, pushing bond yields to the lowest level since May 2013, as the International Monetary Fund’s global growth outlook cut and subdued inflation fueled demand for the safety of U.S. government debt.
A $27 billion sale of three-year notes drew the strongest demand since February, with traders willing to lend cash in the repurchase agreement market to borrow the securities. Stocks tumbled and crude oil headed toward the lowest close in 17 months as the IMF warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.
“The fear of a global slowdown is driving everything,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is still concern about the labor market in the U.S. and the IMF coming out and downgrading their growth expectation is not comforting.”
The 30-year yield dropped eight basis points, or 0.08 percentage point, to 3.05 percent as of 2:41 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.125 percent note due in August 2044 added 1 15/32, or $14.69 per $1,000 face amount, to 101 13/32. The 10-year yield dropped six basis points to 2.37 percent, the lowest level since Aug. 29.
The Standard & Poor’s 500 Index of stocks fell 0.5 percent.
Risk Off
“The risk-off environment is continuing with stocks weaker, putting a flight-to-quality bid in the market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, fell to 60.44 basis points yesterday from 62.5 on Oct. 3. The 2014 average is 59.5 basis points.
The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $264.8 billion yesterday from $430.7 billion on Oct. 3. This year’s average is $326 billion.
The three-year notes yielded 0.994 percent at the auction, compared with a forecast of 1.004 percent in a Bloomberg News survey of six of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.42, versus an average of 3.32 for the past 10 sales.
Auction Assessment
“It was a strong auction,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, a primary dealer. “It’s one of those events that show there’s a lot of money in the system.” Indirect bidders, a class of investors that includes foreign central banks, purchased 35.5 percent of the notes sold, compared with 33.1 percent at the Sept. 9 sale and an average of 32.8 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 17.4 percent of the notes, versus 20.3 percent at last month’s sale and an average of 18.7 percent at the past 10 auctions.
Three-year notes have returned 0.7 percent this year, compared with an advance of 4.2 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries fell 3.4 percent.
Debt Sales
The U.S. will sell $21 billion in 10-year notes tomorrow and $13 billion in 30-year debt the next day.
The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year, the Washington-based IMF said. U.S. growth is helping lead a worldwide acceleration that’s weaker than the fund predicted 2 1/2 months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate.
The Fed releases tomorrow the minutes of its September policy meeting in which it increased its median estimate for the federal funds rate. Traders see a 45 percent chance Fed officials will raise their benchmark rate by July 2015, fed funds futures data compiled by Bloomberg showed, down from 59.4 percent on Sept. 18, a day after Fed policy makers met. The target has been in a range of zero to 0.25 percent since December 2008.
U.S. policy makers meeting on Sept. 16-17 raised their median estimate for the fed funds rate to 1.375 percent at the end of 2015, compared with a June forecast of 1.125 percent.
Global Banks Face 25% Loss-Absorbency Rule in FSB Plan
The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis -- as much as a quarter of risk-weighted assets -- as regulators take on lenders deemed too big to fail. The Financial Stability Board is developing minimum standards that will limit the double-counting of capital banks use to meet existing international rules, according to an FSB working document sent for comment to Group of 20 governments and obtained by Bloomberg News.
The restriction means that, while the basic requirement will be set at 16 percent to 20 percent of risk-weighted assets, the final number will be higher because the banks must separately meet “other regulatory capital buffers,” according to the document, dated Sept. 21. The FSB in Basel, Switzerland, declined to comment on the non-public document.
“These standards are an important step in developing a strategy which will limit taxpayers’ exposure to failing banks, but of course a lot of work still has to be done to determine how much flexibility national regulators will have or even need when applying the rules,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.
The FSB, which consists of regulators and central bankers from around the world, plans to present the draft rules to a G-20 summit in Brisbane, Australia, next month. The plans, which will be published for comment and completed next year, are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail.
Resolution Costs
The FSB maintains a list of globally systemic banks that it updates each November. The latest list included 29 banks and identified HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM) as the banks whose failure would do the most damage to the global economy.
The FSB plan would force the world’s most systemically important banks to issue junior debt and other securities that could be written down in a straightforward manner and cover costs associated with winding down or restructuring. The rule would fully apply in 2019 at the earliest. Bank of England Governor Mark Carney, the FSB’s chairman, has said that the measure is needed to prevent taxpayer-funded bailouts of banks.
“It is essential that systemically important institutions can be resolved in the event of failure without the need for taxpayer support, while at the same time avoiding disruption to the wider financial system,” Carney wrote in a letter to the G-20 last month.
Capital Buffers
The FSB proposals include criteria that debt and other securities have to meet to count toward a bank’s minimum required “total loss absorbency capacity,” or TLAC. Under the TLAC standard, lenders wouldn’t be able to count the equity they use to satisfy two existing international capital buffers.
The first of these, set in 2010 by the Basel Committee on Banking Supervision, requires banks to have core capital equivalent to 2.5 percent of risk-weighted assets beyond the minimum Basel requirement to absorb losses. Failure to meet this standard can result in curbs on the bank’s ability to pay bonuses and dividends.
The second buffer, set by the FSB for the world’s biggest banks, can also rise to 2.5 percent of risk-weighted assets, and provides an extra safeguard in case of crisis. Both requirements must be met with the highest-quality capital, such as ordinary shares and retained earnings. Thus the basic requirement of 16 percent to 20 percent of risk-weighted assets can swell to 21 percent to 25 percent, and could go even higher if a bank had to comply with a so-called countercyclical buffer set by its local regulator to tame credit booms.
Insolvency Law
While the FSB plan doesn’t specify the instruments that count toward TLAC, it spells out liabilities that don’t qualify, such as those “which are preferred to normal senior unsecured creditors under the relevant insolvency law,” or which arise from derivatives.
Also excluded are liabilities that “cannot be effectively written down or converted into equity by the relevant resolution authority,” according to the document. Debt issued by the bank would also need to “have a minimum remaining maturity” of at least a year to count.
“This approach seeks to satisfy the U.S. and U.K., which want loss absorption provided by long-term, unsecured debt and at the same time cut the rest of the world some slack by allowing the buffer also to include capital,” said Karen Shaw Petrou, managing partner of Washington-based research firm Financial Analytics Inc.
“This may permit G-20 finalization of the FSB consultation, but it’s most unclear if it will resolve the current quandary posed by widely varying resolution protocols in key financial centers,” she said. Regulators have indicated that the bulk of instruments used to meet TLAC rules should be made up of capital and subordinated debt.
“From experience, we know that some uninsured, unsecured liabilities are not as reliably loss-absorbing in resolution as others and, in practice, it has been difficult to break into the senior class,” Andrew Gracie, the Bank of England’s executive director for resolution, said in July. “In part it is because of the potential adverse consequences of taking resolution action within a class which includes liabilities that it is difficult to bail in,” he said.
Under the FSB plan, instruments that could toward a bank’s TLAC must normally “absorb losses prior to” liabilities that don’t qualify, without “giving rise to material risk of successful legal challenge or compensation claims.”
Still, there is some flexibility built into this rule to take account of European Union law, which gives regulators some discretion to decide whether or not certain liabilities should be hit with writedowns. In such cases, banks would be given scope to count some liabilities as TLAC even if they have similar seniority to securities on the FSB’s excluded list.
Banks would be able to count such securities up to an amount equivalent to 2.5 percent of their risk-weighted assets.
Greek Bonds Drop to Six-Month Low Before Confidence Vote
Greek bonds declined, pushing 30-year yields to the highest in more than six months, as Prime Minister Antonis Samaras prepared for a confidence vote this week intended to head off opposition attempts to force an election.
Greece’s bonds were the euro-region’s worst performing government securities last month after Samaras said the country may seek to become self-financing and forgo some financial aid from the International Monetary Fund. Its troika of creditors -- the IMF, the European Commission and the European Central Bank - - insists that some form of credible external backstop is needed, according to two officials with knowledge of the discussions with the government.
“It had been looming large already, but the confirmation that the Greek government will face a confidence vote on Friday is a big event risk,” said David Schnautz, a fixed-income strategist at Commerzbank AG in New York. “Moreover, the market likes the troika as a watchdog for Greece. Especially after so many hard years and given the domestic political uncertainty, there is a big risk that austerity fatigue will be massive.”
Greek 30-year yields rose 25 basis points, or 0.25 percentage point, to 7.31 percent at 3:54 p.m. London time, the biggest increase since May 15. They touched 7.35 percent, the highest since March 14. The 2 percent security due in February 2042 fell 2.07, or 20.70 euros per 1,000-euro ($1,263) face amount, to 58.38.
Prime Minister Samaras is seeking to reduce reliance on Greece’s 240 billion-euro bailout and its accompanying conditions for financial reform. Alexis Tsipras, leader of the opposition Syriza party, is aiming to force a snap election in the first quarter of 2015 that opinion polls show his party would probably win. One policy he favors is writing off some of Greece’s debt.
Greek government securities lost 6.8 percent in September, Bloomberg World Bond Indexes show. They returned 23 percent this year, the best-performing sovereign bonds in the indexes.
source: Bloomberg
A $27 billion sale of three-year notes drew the strongest demand since February, with traders willing to lend cash in the repurchase agreement market to borrow the securities. Stocks tumbled and crude oil headed toward the lowest close in 17 months as the IMF warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.
“The fear of a global slowdown is driving everything,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is still concern about the labor market in the U.S. and the IMF coming out and downgrading their growth expectation is not comforting.”
The 30-year yield dropped eight basis points, or 0.08 percentage point, to 3.05 percent as of 2:41 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.125 percent note due in August 2044 added 1 15/32, or $14.69 per $1,000 face amount, to 101 13/32. The 10-year yield dropped six basis points to 2.37 percent, the lowest level since Aug. 29.
The Standard & Poor’s 500 Index of stocks fell 0.5 percent.
Risk Off
“The risk-off environment is continuing with stocks weaker, putting a flight-to-quality bid in the market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, fell to 60.44 basis points yesterday from 62.5 on Oct. 3. The 2014 average is 59.5 basis points.
The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $264.8 billion yesterday from $430.7 billion on Oct. 3. This year’s average is $326 billion.
The three-year notes yielded 0.994 percent at the auction, compared with a forecast of 1.004 percent in a Bloomberg News survey of six of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.42, versus an average of 3.32 for the past 10 sales.
Auction Assessment
“It was a strong auction,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, a primary dealer. “It’s one of those events that show there’s a lot of money in the system.” Indirect bidders, a class of investors that includes foreign central banks, purchased 35.5 percent of the notes sold, compared with 33.1 percent at the Sept. 9 sale and an average of 32.8 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 17.4 percent of the notes, versus 20.3 percent at last month’s sale and an average of 18.7 percent at the past 10 auctions.
Three-year notes have returned 0.7 percent this year, compared with an advance of 4.2 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries fell 3.4 percent.
Debt Sales
The U.S. will sell $21 billion in 10-year notes tomorrow and $13 billion in 30-year debt the next day.
The world economy will grow 3.8 percent next year, compared with a July forecast for 4 percent, after a 3.3 percent expansion this year, the Washington-based IMF said. U.S. growth is helping lead a worldwide acceleration that’s weaker than the fund predicted 2 1/2 months ago as the outlooks for the euro area, Brazil, Russia and Japan deteriorate.
The Fed releases tomorrow the minutes of its September policy meeting in which it increased its median estimate for the federal funds rate. Traders see a 45 percent chance Fed officials will raise their benchmark rate by July 2015, fed funds futures data compiled by Bloomberg showed, down from 59.4 percent on Sept. 18, a day after Fed policy makers met. The target has been in a range of zero to 0.25 percent since December 2008.
U.S. policy makers meeting on Sept. 16-17 raised their median estimate for the fed funds rate to 1.375 percent at the end of 2015, compared with a June forecast of 1.125 percent.
Global Banks Face 25% Loss-Absorbency Rule in FSB Plan
The largest global banks will have to hold more capital and liabilities than previously reported that can automatically be written off in a crisis -- as much as a quarter of risk-weighted assets -- as regulators take on lenders deemed too big to fail. The Financial Stability Board is developing minimum standards that will limit the double-counting of capital banks use to meet existing international rules, according to an FSB working document sent for comment to Group of 20 governments and obtained by Bloomberg News.
The restriction means that, while the basic requirement will be set at 16 percent to 20 percent of risk-weighted assets, the final number will be higher because the banks must separately meet “other regulatory capital buffers,” according to the document, dated Sept. 21. The FSB in Basel, Switzerland, declined to comment on the non-public document.
“These standards are an important step in developing a strategy which will limit taxpayers’ exposure to failing banks, but of course a lot of work still has to be done to determine how much flexibility national regulators will have or even need when applying the rules,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland.
The FSB, which consists of regulators and central bankers from around the world, plans to present the draft rules to a G-20 summit in Brisbane, Australia, next month. The plans, which will be published for comment and completed next year, are part of a package of measures designed to make sure taxpayers are no longer on the hook when banks fail.
Resolution Costs
The FSB maintains a list of globally systemic banks that it updates each November. The latest list included 29 banks and identified HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM) as the banks whose failure would do the most damage to the global economy.
The FSB plan would force the world’s most systemically important banks to issue junior debt and other securities that could be written down in a straightforward manner and cover costs associated with winding down or restructuring. The rule would fully apply in 2019 at the earliest. Bank of England Governor Mark Carney, the FSB’s chairman, has said that the measure is needed to prevent taxpayer-funded bailouts of banks.
“It is essential that systemically important institutions can be resolved in the event of failure without the need for taxpayer support, while at the same time avoiding disruption to the wider financial system,” Carney wrote in a letter to the G-20 last month.
Capital Buffers
The FSB proposals include criteria that debt and other securities have to meet to count toward a bank’s minimum required “total loss absorbency capacity,” or TLAC. Under the TLAC standard, lenders wouldn’t be able to count the equity they use to satisfy two existing international capital buffers.
The first of these, set in 2010 by the Basel Committee on Banking Supervision, requires banks to have core capital equivalent to 2.5 percent of risk-weighted assets beyond the minimum Basel requirement to absorb losses. Failure to meet this standard can result in curbs on the bank’s ability to pay bonuses and dividends.
The second buffer, set by the FSB for the world’s biggest banks, can also rise to 2.5 percent of risk-weighted assets, and provides an extra safeguard in case of crisis. Both requirements must be met with the highest-quality capital, such as ordinary shares and retained earnings. Thus the basic requirement of 16 percent to 20 percent of risk-weighted assets can swell to 21 percent to 25 percent, and could go even higher if a bank had to comply with a so-called countercyclical buffer set by its local regulator to tame credit booms.
Insolvency Law
While the FSB plan doesn’t specify the instruments that count toward TLAC, it spells out liabilities that don’t qualify, such as those “which are preferred to normal senior unsecured creditors under the relevant insolvency law,” or which arise from derivatives.
Also excluded are liabilities that “cannot be effectively written down or converted into equity by the relevant resolution authority,” according to the document. Debt issued by the bank would also need to “have a minimum remaining maturity” of at least a year to count.
“This approach seeks to satisfy the U.S. and U.K., which want loss absorption provided by long-term, unsecured debt and at the same time cut the rest of the world some slack by allowing the buffer also to include capital,” said Karen Shaw Petrou, managing partner of Washington-based research firm Financial Analytics Inc.
“This may permit G-20 finalization of the FSB consultation, but it’s most unclear if it will resolve the current quandary posed by widely varying resolution protocols in key financial centers,” she said. Regulators have indicated that the bulk of instruments used to meet TLAC rules should be made up of capital and subordinated debt.
“From experience, we know that some uninsured, unsecured liabilities are not as reliably loss-absorbing in resolution as others and, in practice, it has been difficult to break into the senior class,” Andrew Gracie, the Bank of England’s executive director for resolution, said in July. “In part it is because of the potential adverse consequences of taking resolution action within a class which includes liabilities that it is difficult to bail in,” he said.
Under the FSB plan, instruments that could toward a bank’s TLAC must normally “absorb losses prior to” liabilities that don’t qualify, without “giving rise to material risk of successful legal challenge or compensation claims.”
Still, there is some flexibility built into this rule to take account of European Union law, which gives regulators some discretion to decide whether or not certain liabilities should be hit with writedowns. In such cases, banks would be given scope to count some liabilities as TLAC even if they have similar seniority to securities on the FSB’s excluded list.
Banks would be able to count such securities up to an amount equivalent to 2.5 percent of their risk-weighted assets.
Greek Bonds Drop to Six-Month Low Before Confidence Vote
Greek bonds declined, pushing 30-year yields to the highest in more than six months, as Prime Minister Antonis Samaras prepared for a confidence vote this week intended to head off opposition attempts to force an election.
Greece’s bonds were the euro-region’s worst performing government securities last month after Samaras said the country may seek to become self-financing and forgo some financial aid from the International Monetary Fund. Its troika of creditors -- the IMF, the European Commission and the European Central Bank - - insists that some form of credible external backstop is needed, according to two officials with knowledge of the discussions with the government.
“It had been looming large already, but the confirmation that the Greek government will face a confidence vote on Friday is a big event risk,” said David Schnautz, a fixed-income strategist at Commerzbank AG in New York. “Moreover, the market likes the troika as a watchdog for Greece. Especially after so many hard years and given the domestic political uncertainty, there is a big risk that austerity fatigue will be massive.”
Greek 30-year yields rose 25 basis points, or 0.25 percentage point, to 7.31 percent at 3:54 p.m. London time, the biggest increase since May 15. They touched 7.35 percent, the highest since March 14. The 2 percent security due in February 2042 fell 2.07, or 20.70 euros per 1,000-euro ($1,263) face amount, to 58.38.
Prime Minister Samaras is seeking to reduce reliance on Greece’s 240 billion-euro bailout and its accompanying conditions for financial reform. Alexis Tsipras, leader of the opposition Syriza party, is aiming to force a snap election in the first quarter of 2015 that opinion polls show his party would probably win. One policy he favors is writing off some of Greece’s debt.
Greek government securities lost 6.8 percent in September, Bloomberg World Bond Indexes show. They returned 23 percent this year, the best-performing sovereign bonds in the indexes.
source: Bloomberg