Stock Markets

US Treasury bond spree could jolt markets if leveraged bets unravel

Published

1 year ago

June 22, 2023

An expected surge in Treasury bill issuance could throw a wrench into the gears of hedge fund trades that have resulted in record short positions, potentially disrupting bond markets if speculators quickly unwind their holdings.

In recent weeks, hedge funds have taken significant short leveraged positions in some Treasuries futures – contracts for the purchase and sale of bonds for future delivery – as part of a so-called basis trade which takes advantage of a difference between the price of cash bonds and futures, analysts say. The difference is partly resulting from asset managers’ demand for Treasuries futures, which could be due to economic concerns, analysts said.

However, new government bond issuance could push up rates in short-term funding markets where hedge funds leverage their holdings, possibly leading to an unwind of this positioning. This, in turn, could pressure bonds or even force the Federal Reserve to intervene, analysts have cautioned.

“This could be one risk to that kind of trade developing that forces a lot of these funds to close these basis trades and then create shock waves throughout the market,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.

The recent resolution of the U.S. debate over extending the debt ceiling means Treasury bill sales are set to surge to about $1 trillion by year end as the Treasury General Account (TGA) is replenished. Generally, an increase in government borrowing drains reserves from the banking system, and because banks absorb the new issuance they have less money to lend.

That scenario could lead to a spike in rates in the repurchase agreements (repo) market, similar to what happened in September 2019. That was when falling reserves led to a surge in the cost that banks and other market players pay to raise overnight loans to fund their trades, forcing the Fed to intervene by injecting liquidity into repo markets.

“Less liquidity could mean a shift in the supply and demand of the repo market,” with hedge funds potentially facing higher rates just because there is less cash in the system to lend, said Steven Zeng, U.S. rates strategist at Deutsche Bank.

In that case, a large but orderly unwinding of hedge funds’ positions in Treasuries could push yields higher relative to other fixed-income instruments, he added. “A bad outcome … would be a disorderly unwind of these trades, which forces the Fed to step in.”

To be sure, the risk of liquidity drainage would diminish if money market funds absorbed the new Treasury bill issuance by reducing their investments in the Fed’s reverse repo facility (RRP), where they park their cash.

But some analysts fear bank reserves could decline if the Treasury bills do not offer higher returns than the RRP or if expectations of more interest rate hikes discourage money funds from extending the duration of their investments.

U.S. Treasury Secretary Janet Yellen last week said her department was monitoring for signs of market disruptions as the government rebuilds its cash balance through Treasury bills.

Fed Chair Jerome Powell also said in a press conference last week that the Fed would be “monitoring market conditions carefully” as the Treasury refills its balance.

BASIS TRADE

Relative value hedge funds and macro managers are typical hedge funds that enter basis trades, which work by selling a futures contract, buying Treasuries deliverable into that contract with repo funding, and delivering them at contract expiry. The unwinding of basis trade positions contributed to illiquidity in Treasuries in March 2020, when the market seized up amid rising pandemic fears, prompting the Fed to buy $1.6 trillion of government bonds.

Commodity Futures Trading Commission (CFTC) data at the end of May showed speculators’ bearish bets on U.S. Treasury two-year, five-year, and 10-year bonds had grown to their largest ever. Some of those shorts have been scaled back, but net shorts on two-year notes hit a new record in the week ending June 13.

Some hedge funds may short Treasuries because of macroeconomic assumptions.

“Quantitative hedge funds have been shorting Treasuries because trend models continue to indicate downtrend in prices and discretionary hedge funds see negatives, such as inflation, tight labor market and the hawkish Fed,” said Deepak Gurnani, founder and managing partner at hedge fund Versor Investments.

But according to several analysts, the recent buildup in shorts was more the result of the arbitrage opportunity than an indication of speculators’ bets on the direction of rates.

The buildup in shorts has coincided with an increased use of the repo market.

The volume of transactions underlying the Secured Overnight Financing Rate (SOFR), which is a measure of the cost of borrowing cash overnight collateralized by Treasuries, has risen rapidly this year, data from the New York Federal Reserve shows.

SOFR volume topped $1.6 trillion on June 1 – the highest since the New York Fed began publication of the rate in 2018.

“That data matches very well with the shorts by leveraged investors, so that’s suggesting that the leveraged funds are going long in cash Treasuries and being short in the futures,” said Deutsche Bank’s Zeng.

Stock Markets

Consumers Energy Expanding Community Solar Program with 30-Acre Solar Project in Jackson County

Published

7 hours ago

September 20, 2024

JACKSON, Mich., Sept. 19, 2024 /PRNewswire/ — Consumers Energy plans to break ground next spring on Blackman Solar, a new 30-acre community solar array in its home Jackson County that will provide local clean energy to customers through its Solar Gardens program.

Consumers Energy this week received approval from Blackman Township for the community solar project, which is slated to start generating electricity by the end of 2025.

“Blackman Solar is a great example of a partnership with a community to develop a project that delivers reliable, clean energy as well as local tax and economic benefits,” said David Hicks. Consumers Energy’s vice president of renewable energy development. “We’re grateful for the reception we’ve received from Blackman Township leaders and are excited to continue developing solar projects like this on our path to a carbon-neutral electric grid.”

Blackman Solar will generate power for Consumers Energy’s Solar Gardens community solar program, in which customers choose to support new solar projects without having to own solar arrays.

The new community solar facility will be the fourth that Consumers Energy owns and operates, joining other Solar Gardens projects in Cadillac, at Western Michigan University and at Grand Valley State University. Blackman Solar will include nearly 5,000 solar panels and will generate up to 2.5 megawatts of renewable electricity for 2,500 future Solar Gardens customers.

Blackman Solar also will provide new capacity to expand Consumers Energy’s income-qualified Solar Gardens program MI Sunrise. MI Sunrise is an efficient, easy, cost-effective way for municipalities, nonprofits and tribal governments to deploy federal grant dollars, providing access to clean, reliable renewable energy and measurable financial benefits to offset energy bills.

“Blackman Solar will help meet increased demand for community solar and offers shared solar infrastructure, accessibility and inclusivity, as well as financial and environmental benefits for all customers,” Hicks said.

Consumers Energy is committed to Michigan’s clean energy future. The energy provider is closing its final three coal-burning units next summer, one of the nation’s most aggressive timetables. The company is developing solar projects as part of its Clean Energy Plan to be carbon-neutral by 2040.

Consumers Energy is Michigan’s largest energy provider, providing and/or electricity to 6.8 million of the state’s 10 million residents in all 68 Lower Peninsula counties. Consumers Energy’s Clean Energy Plan calls for eliminating coal as an energy source in 2025, achieving net-zero carbon emissions and meeting 90% of customers’ energy needs through clean sources, including wind and solar.

For more information about Consumers Energy, go to ConsumersEnergy.com.

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Stock Markets

First Horizon Is Now the Official Bank of the Ragin’ Cajuns

Published

7 hours ago

September 20, 2024

MEMPHIS, Tenn., Sept. 19, 2024 /PRNewswire/ — First Horizon (NYSE:) Corp. (NYSE: FHN or “First Horizon“) is proud to announce that First Horizon Bank is now the Official Bank of the University of Louisiana at Lafayette Ragin’ Cajuns.

This five-year agreement expands First Horizon’s long-term commitment to the University and includes a Ragin’ Cajun Visa (NYSE:) Debit card, prominent in-venue signage, entertainment and hospitality opportunities along with participation in game day fan activations and experiences, including the new Cajun Village.

“This is an exciting time to expand our partnership with ULL and ULL athletics,” said Jerry Prejean, President of Acadiana for First Horizon. “With more than $2.5 million invested in recent years towards academic and athletic excellence, First Horizon is proud to deepen our relationship with the University and work together as two long-standing community leaders dedicated to making Acadiana a great place to call home.”

“As opportunities have grown for businesses to support Ragin’ Cajuns athletics, First Horizon Bank has been right there growing with us every step of the way,” adds Brian Bille, General Manager of LEARFIELD-based Ragin’ Cajuns Sports Properties. “Jerry’s commitment to our community has never wavered, and I’m excited to help First Horizon build affinity with our fans through this enhanced partnership, and encourage our fans to add the all-new Ragin’ Cajuns branded debit card to their wallet.”

About First Horizon
First Horizon Corp. (NYSE: FHN), with $82.2 billion in assets as of June 30, 2024, is a leading regional financial services company, dedicated to helping our clients, communities and associates unlock their full potential with capital and counsel. Headquartered in Memphis, TN, the banking subsidiary First Horizon Bank operates in 12 states across the southern U.S. The Company and its subsidiaries offer commercial, private banking, consumer, small business, wealth and trust management, retail brokerage, capital markets, fixed income, and mortgage banking services. First Horizon has been recognized as one of the nation’s best employers by Fortune and Forbes magazines and a Top 10 Most Reputable U.S. Bank. More information is available at www.FirstHorizon.com.

Stock Markets

Oil prices rise on easing demand worries after jumbo Fed rate cut

Published

7 hours ago

September 20, 2024

Investing.com — Oil prices jumped Thursday, riding on a wave of risk-on sentiment as the Federal Reserve’s outsized interest rate cut on Wednesday eased worries that a slowing US economy would further dent crude demand.

At 2:06 p.m. ET (1906 GMT), rose 1.6% to $74.80 a barrel and rose 1.8% to $71.12 a barrel.

Jobless claims rise by less than expected

The number of Americans filing for first-time unemployment benefits rose by less than anticipated last week, with coming in at 219,000 in the week ended on Sept. 14, compared with an upwardly revised 231,000 in the prior week.

Economists had forecast a consensus figure of 230,000.

This figure was better than expected, and has allayed to a degree concerns over the health of the US economy, particularly after the Federal Reserve started its latest rate-cutting cycle on Wednesday, trimming interest rates for the first time since March 2020 by a hefty 50 basis points to a range of 4.75% to 5%.

While lower rates usually bode well for economic activity, the Fed’s aggressive cut sparked some concerns over a potential slowdown in economic growth.

While Fed Chair Jerome Powell helped soothe some of these concerns, he also said that the Fed had no intention of returning to an era of ultra-low interest rates, and that the central bank’s neutral rate was likely to be much higher than seen in the past.

His comments indicated that while interest rates will fall in the near-term, the Fed was likely to keep rates higher in the medium-to-long term.

US inventories fall, but product stockpiles up

Government data released on Wednesday showed a bigger-than-expected, 1.63 million barrel draw in .

While the draw was much bigger than expectations for a draw of 0.2 mb, it was also accompanied by builds in and inventories.

The builds in product inventories sparked increased concerns that U.S. fuel demand was cooling as the travel-heavy summer season wound to a close.

Looking ahead, some expect further draws in domestic crude stocks as exports reaccelerate.

“We look for a significant rebound in exports across crude and products this week. Among products, our preliminary expectations point to draws in gasoline (-1.5 MM BBL) and distillate (-3.7 MM BBL) with a build in jet (+0.5 MM BBL),” Macquarie said in a recent note.

Crude deficit could boost Brent

Still, prices could be bolstered in the near-term by demand possibly outstripping supply in the fourth quarter, according to analysts at Citi.

A reported decision by the Organization of the Petroleum Exporting Countries and its allies to delay the beginning of a tapering in voluntary output cuts, along with ongoing supply losses in Libya, is predicted to contribute to a oil market deficit of around 0.4 million barrels per day in the final three months of 2024, the Citi analysts said.

They added that such a trend could offer some temporary support to Brent “in the $70 to $75 per barrel range.”

Meanwhile, the benchmark could be further boosted by a potential rebound in recently tepid demand from top oil importer China, the analysts said.

But they flagged that they still anticipate “renewed price weakness” in 2025, with Brent on a path to $60 per barrel due to an impending surplus of one million barrels per day.

(Peter Nurse, Ambar Warrick contributed to this article.)