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Moody’s boosted Italy’s sovereign-credit rating on expectations for a decline in government debt.
The ratings agency on Friday upgraded Italy’s rating one level to Baa2 from Baa3. The outlook was revised to stable from positive.
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Kelly Cloonan
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The U.K. government’s borrowing continued to run ahead of projections in October, a deterioration in its finances that it will aim to correct with tax rises and some spending cuts in its annual budget statement next week.
The Office for National Statistics on Friday said the government borrowed 17.4 billion pounds ($22.75 billion) in October, bringing the total for the first seven months of the fiscal year to 116.8 billion pounds, 9.9 billion pounds above the amount projected by the Office for Budget Responsibility in its March forecasts.
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Paul Hannon
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LONDON—The U.K. has long been torn between two mutually exclusive desires: Voters want European levels of welfare with American levels of taxation.
By accident or design, that debate is slowly being resolved in the direction of higher taxes, as Britain’s Labour government prepares its second major tax increase in as many years.
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David Luhnow
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Bessent Says ‘Tenfold’ Growth in Stablecoins Will Lift Demand for Treasurys
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The U.K. government’s upcoming budget will focus on lowering inflation and paving the way for the Bank of England to lower its key interest rate, treasury chief Rachel Reeves said Tuesday.
In a speech, Reeves also said the Nov. 26 budget would aim to lower the government’s debt, but also protect public services. She didn’t rule out a rise in taxes on households, which many economists see as the only option left to the government if it is to achieve its other goals.
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Paul Hannon
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The European debt crisis of the early 2010s created an image of a continent cleaved in two: The fiscally responsible core countries led by Germany versus the spendthrift southern periphery of Portugal, Italy, Greece and Spain—disdainfully dubbed PIGS.
Nowadays, there has been a role reversal. Europe’s three biggest economies are stuck in a cycle of weak growth, leading to widening budget deficits. France is the epicenter of this shift and remains mired in a budget and political crisis, while the U.K. is eyeing tax hikes to try to narrow the gap and avoid spooking markets. Famously frugal Germany and the Netherlands are taking on debt, albeit from lower levels.
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Chelsey Dulaney
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The U.K.’s troubled statistics office cut its estimate for net government borrowing by 3 billion pounds ($4.03 billion), a further setback for the agency that has faced criticism from the Bank of England and lawmakers.
The Office for National Statistics said the U.K. government’s tax authority, HM Revenue and Customs, informed it of an error in value-added tax receipts data it supplied to the data agency.
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Ed Frankl
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Moody’s Investors Service on Tuesday cut the outlook on China’s debt to negative from stable citing expectations that the national government will have to step in to rescue regional and local governments.
Moody’s kept China’s long-term rating at A1.
“The change to a negative outlook reflects rising evidence that financial support will be provided by the government and wider public sector to financially-stressed regional and local governments and state-owned enterprises, posing broad downside risks to China’s fiscal, economic and institutional strength,” said the note from the rating agency, which last month cut the outlook on the U.S.
China’s property troubles mean that regional and local governments face a loss of land sale revenue, which accounted for 37% of their revenue in 2022 outside of central government transfers. Moody’s says regions that relied most heavily on land sales won’t be able to offset that revenue loss from other sources.
Moody’s estimates one-third of state-owned enterprises debt — some 40% of GDP — has an interest coverage below 1, which indicates weak debt sustainability. “While not all [state-owned enterprises] are likely to need direct government support, even a moderate proportion doing so over the medium term would represent a significant crystallization of contingent liabilities for the sovereign, increasing the costs of financial support and diminishing fiscal strength,” said Moody’s.
In a rough day for Chinese stocks, the Hang Seng
HK:HSI
fell 1.9%, and the Shanghai Composite
CN:SHCOMP
dropped 1.7%.
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If Donald Trump were to be elected president in 2024, what would it mean for U.S. tax policy and the national debt?
There are growing expectations that he could deliver another round of big tax cuts, with the reductions coming right as those enacted in 2017’s Tax Cut and Jobs Act are due to expire in 2025.
“If Republicans hold their House…
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It was a trading day unlike any other for traders in the $25 trillion Treasury market, with a 30-year bond auction seen as having been partially undermined by a cyberattack on the U.S. unit of a Chinese bank.
In recapping Treasury’s poorly received $24 billion bond auction on Thursday, traders said the weaker-than-expected results likely had at least something to do with this week’s ransomware hit on the American arm of Industrial & Commercial Bank of China, known as ICBC. That attack reportedly caused disruptions across the market and had some impact on liquidity, with the Financial Times citing unnamed sources as saying hedge funds and asset managers were forced to reroute trades.
Traders were grappling on Friday to answer the question of what created the sudden lack of interest at the auction, which went so badly that it also shook up U.S. stock investors. Thursday’s sale was the worst since November 2021, based on the extent to which primary dealers were forced to step in and pick up the slack in demand, one trader said. And it reinforced a recent pattern of weak auctions for the 30-year bond that may not bode well for future sales of that long-dated maturity.
It’s possible that bonds simply “look much less attractive” following a recent “explosive rally” since late October, according to Charlie McElligott, a cross-asset macro strategist at Nomura Securities in New York. However, “this might be the case of ‘more than meets the eye’ to this ‘ugly auction evidencing low demand for duration’ story,” he wrote in a note.
“One dynamic that makes yesterday’s ugly auction results murky was the ICBC cyberattack described across various financial media, which gunked-up anybody who clears UST trades through them, and made it so that many dealers were then likely unable to trade with those clients until resolved, on account of unsettled trades which weren’t able to be matched,” McElligott said.
Adding to Thursday’s uncertainty was another random event. Federal Reserve Chairman Jerome Powell appeared on stage in an International Monetary Fund panel, was interrupted by a climate protester, and then uttered a seven-letter expletive that could be heard on the event’s livestream.
Powell’s policy-related remarks, which indicated the central bank might take further action to control inflation, “didn’t help things and kind of spooked people again,” said John Farawell, head of municipal trading at New York bond underwriter Roosevelt & Cross.
Read: Fed’s Powell Made Cryptic Comments. How He’s Guiding the Market.
On Friday, the Treasury market found stabilization as buyers returned to segments of government debt in a sign that calm was being restored. A rush of buying was seen on the 30-year bond
BX:TMUBMUSD30Y,
sending its yield down to 4.733% and to a third straight weekly decline.
Meanwhile, Bloomberg News reported that the repercussions of the ICBC cyberattack included an inability to deliver U.S. debt that was being pledged as collateral. ICBC’s U.S. unit was forced to rely on a messenger carrying a USB stick across Manhattan to complete disrupted trades, according to the news service, which also described Thursday’s $24 billion 30-year bond auction as one of the worst in a decade.
The ICBC attack “might have had a dramatic impact on the auction. I don’t know how much, but I also can’t imagine it didn’t,” said Tom di Galoma, co-head of global rates trading for BTIG in New York. “When people see that there are trade-settlement issues, there’s a willingness to back off and that’s exactly what happened yesterday. Institutional accounts were saying, ‘We don’t know who is settling this trade.’ If the cyberattack hadn’t happened, I think the auction would have gone a lot better.”
Ben Emons, a senior portfolio manager and head of fixed income for NewEdge Wealth in New York, said that once the Treasury market got upended by the ICBC cyberattack, the bad auction, and the interruption during Powell’s appearance, liquidity on U.S. government debt “was, for a moment, a dark matter.”
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A weak session is setting up for Tuesday, with oil under pressure after unexpectedly downbeat China export data. So the preference is for bonds this morning, as stock futures tilt south.
Onto our call of the day, which deals with another worry — a wall of government debt that will be with us for decades. It comes from Bridgewater’s highly regraded co-chief investment officer Bob Prince, who was speaking at the Global Financial Leaders’ Investment Summit on Tuesday, hosted by the Hong Kong Monetary Authority.
Prince touches on asset liability mismatches, such as what was seen during the banking crisis earlier this year. He explains that one big factor behind a crisis is when a certain economic regime exists for an extended period of time and “people extrapolate that into the future on the basis of leverage and asset liability mismatches. Then you get a shift in that regime.”
The events of March, which saw the collapse of SVB, Signature Bank and Silvergate, were a perfect example of that, Prince says. Then he turns to what he calls the “broader effects of a transition from 15 years of abundant free money,” that was first used to battle deleveraging pressures in the financial system in 2008 and then the pandemic.
One long-term effect of that gets particular attention by Prince, who points out how U.S. government Treasury debt to GDP was about 70% in 2008, around where it had been for decades.
“The after effects of offsetting deleveraging and pandemic, you’ve had a massive wealth shift from the public sector to the private sector and that’s left the government with debt to GDP up from 70% up to 120%. And the particular vulnerability of that is in the debt rollovers and the gross issuance that you’re going to see in the coming decades . You’re stuck with that debt until you pay it off and that means you have to roll it over like anybody else does,” said Prince.
“Gross debt issuance will be running at 25% for as far as the eye can see, that means every year you’re issuing 25% of GDP in debt. In 1960, the average amount of debt issuance was 12% of GDP,” he said.
Prince says most people really don’t pay attention to debt rollovers because they just assume those will get done, but notes that when countries have experienced balance of payments crisis in the past, mostly emerging markets, that is because they have been unable to roll over that debt.
In the U.S. case, it’s crucial to look at who is holding the debt, particularly the 27% held by foreign investors and 18% by central banks. “Foreign investors would normally be a reliable source of investment but it does heighten sensitivity to geopolitical risk, and so geopolitical risk converges with debt rollovers and gross issuance of the Treasury is an issue that you need to pay attention to in the coming years.
While not an “acute problem,” he says, it’s a lingering one, and when it comes to central banks it’s also unclear whether their holdings also present a “rollover risk.”
Prince also touches on the fact that that all that “abundant free money” has fueled a private-equity boom, but with interest rates now at 8% instead of 2% or 3%, “the pace and transaction cycle is bound to slow,” and they are starting to see that.
“When we talk to institutional investors around the world, many of them are experiencing liquidity issues right now and the liquidity issues result from the fact so much money was allocated to private assets and the transaction cycle is slowing,” he said.
MarketWatch 50: Forget U.S. stocks for now. Invest here instead, says Bridgewater’s co–investment chief
A team of analysts at Citigroup led by Nathan Sheets have also weighed in on government debt, telling clients in a new note that “it’s unwise for policy makers to experiment or test” where the threshold for too much debt lies. Here’s their chart showing the bleak trajectory:
Dirk Willer, head of global asset allocation at Citigroup, said a debt crisis scenario in the U.S. would likely mean a selloff of risk assets globally. He notes that bonds in rival countries may not be the best bet as they don’t always benefit. And both gold and bitcoin underperformed during the U.K. gilt crisis, so those may be out.
Also in attendance at the conference in Hong Kong, Deutsche Bank’s CEO is worried geopolitics could create another market event and Citadel’s Ken Griffin said investors should put money in China.
Read: ‘Stock-market correction is over’ after broad surge amid ‘epic’ market rallies
Stock futures
ES00,
NQ00,
are pointing to a weak to flat session ahead, while the 10-year Treasury yield
BX:TMUBMUSD10Y
eases back. U.S. crude
CL.1,
is under $80 a barrel after worse-than-forecast China exports signaled more economic bumps in the global growth engine. The dollar
DXY
is up.
Planet Fitness stock
PLNT,
is surging on upbeat results and an improved growth outlook. Uber
UBER,
is up as earnings beat forecasts, but revenue fell short. D.R. Horton
DHI,
stock is also getting a boost from results. EBay
EBAY,
Occidental Petroleum
OXY,
Akamai Tech
AKAM,
and Gilead Sciences
GILD,
after the close.
Reporting late Thursday, Tripadvisor
TRIP,
delivered blowout results and the stock is surging, while Sanmina
SANM,
is down 14% after the manufacturing services provider’s disappointing results.
UBS
UBS,
UBSG,
swung to a $785 million quarterly loss on lingering effects of its Credit Suisse takeover, but it pulled in $33 billion in new deposits and shares are up.
After a decade of turmoil, office-sharing group WeWork
WE,
filed for Chapter 11 bankruptcy protection on Monday.
The U.S. trade deficit climbed 5% in September to $61.5 billion as imports rebounded. Still to come is consumer credit at 3 p.m. Fed Vice Chair for Supervision Michael Barr speaks at 9:15 a.m., followed by Fed Gov. Christopher Waller at 10 a.m.
The International Monetary Fund boosted its China outlook for 2023 and 2024.
Big banks are cooking up new ways to offload risk.
Retirees continue to flock to places where climate risk is high.
How to know when it’s time to retire
According to this recent JPMorgan survey, two-thirds of investors are ready to start pumping more money into equities, while just 19% plan to increase bond exposure. Also, note that 67% also said they did not expect performance of the Magnificent 7 stocks — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta — to “crack before the end of the year.”
These were the top-searched tickers on MarketWatch as of 6 a.m.:
|
TSLA, |
Tesla |
|
AMC, |
AMC Entertainment |
|
NVDA, |
Nvidia |
|
AAPL, |
Apple |
|
NIO, |
NIO |
|
GME, |
GameStop |
|
AMZN, |
Amazon.com |
|
PLTR, |
Palantir Technologies |
|
MULN, |
Mullen Automotive |
|
MSFT, |
Microsoft |
|
NVDA, |
Nvidia |
Fifteen people ended up with eye pain and sight issues after a Bored Ape NFT event.
A death metal band asked for singers on social media. A choir responded.
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The 10-year Treasury yield continued to pull back from 5% on Friday after moving tantalizingly close to surpassing that level in the previous session.
The yield touched 5% at 5:02 p.m. Eastern time on Thursday, only to drift back down, according to Tradeweb data. It ended Friday’s New York session down by 6.3 basis points at 4.924%.
Rising Middle East tensions gave way to renewed safe-haven demand in government debt on Friday that not only sent the 10-year yield
BX:TMUBMUSD10Y
lower, but dragged down rates on everything from 3-month Treasury bills
BX:TMUBMUSD03M
to the 30-year bond
BX:TMUBMUSD30Y.
Investors were trying to catch the proverbial falling knife by taking advantage of a cheaper 10-year Treasury note, the product of recent selloffs. Analysts warn that it’s difficult to have much short-term conviction in catching that knife, however, given the likelihood that the selloff could return.
One big reason is the onslaught of new supply from the U.S. Treasury as the result of the government’s growing borrowing needs, which is raising the risk that investors will keep demanding more compensation to hold long-dated debt to maturity.
On Oct. 30 and Nov. 1, which is the same day as the Federal Reserve’s next policy decision, Treasury is expected to provide updated guidance on its borrowing needs and auction sizes. Treasury’s refunding announcement could even upstage the Federal Open Market Committee — creating “fertile ground for a continuation of the selloff in Treasuries,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.
Over the next several weeks, “it becomes much easier to envision a surge in Treasury yields in anticipation of the upcoming coupon supply,” they wrote in a note on Friday. While the 10-year yield has stopped shy of 5%, “we continue to expect this milestone will be reached shortly.”
Stock-market investors have been focused on the prospects of a 5% 10-year yield because such a level would dent the appeal of equities and make government debt a more attractive investment by comparison.
Read: Why stock-market investors are fixated on 5% as 10-year Treasury yield nears key threshold
As of Friday, the 10-year yield, used as the benchmark on everything from mortgages to student and auto loans, has jumped 163.9 basis points from its 52-week low of almost 3.29% reached on April 5. The 10-year yield hasn’t ended the New York session above 5% since July 19, 2007.
Meanwhile, all three major stock indexes
DJIA
COMP
ended the day lower as the prospects of a widening conflict in the Middle East triggered a flight-to-safety trade into Treasurys.
Taking a step back, a 5% 10-year yield would imply that a Goldilocks-scenario of a U.S. economy — one that’s neither too hot or too cold, and able to sustain moderate growth — “is here to stay for a decade,” or that the Fed’s main interest-rate target needs to be materially higher on average over the next decade, according to BMO’s Lyngen and Jeffery. One of the biggest questions facing policy makers is whether the economy might be moving into a new stage in which even higher interest rates down the road could be required to cool demand and activity.
Though BMO Capital Markets is biased toward lower yields into the weekend given the absence of major economic data on Friday, technical indicators “continue to favor higher rates in the near-term,” and “our conviction that 5% will ultimately be traded through has grown.”
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Carnage in the bond market in September could tee up an opportunity for investors to earn big returns on U.S. government debt in a year.
Owners of 10-year Treasury
BX:TMUBMUSD10Y
notes at recent yields of around 4.5% could reap up to 20% in total returns in a year if the U.S. economy stumbles into a recession, according to UBS Global Wealth Management.
The key would be for U.S. debt to rally significantly as investors scramble for safety in the roughly $25 trillion treasury market.
“U.S. yields remain well above long-term equilibrium levels, providing scope for them to fall as the macroeconomic outlook becomes more supportive for bonds,” a team led by Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management, wrote in a Friday client note.
Their base-case call is for the 10-year Treasury yield to fall to 3.5% in 12 months, with it easing back to 4% in an upside scenario for growth, and for the economy’s benchmark rate to tumble as low as 2.75% in a downside scenario of a U.S. recession.
“That would translate into total returns over the period of 14% in our base case, 10% in our upside economic scenario, and 20% in our downside scenario.”
See: The market ‘may be overpaying you’ on a 10-year Treasury, says Lloyd Blankfein
A rally in Treasury debt could help boost funds that track the Treasury market and the broader U.S. bond sector. The popular iShares 20+ Year Treasury Bond ETF
TLT
was down 10.9% on the year through Friday, while the iShares Core U.S. Aggregate Bond ETF
AGG
was 3% lower, according to FactSet.
A tug of war has been developing in the Treasury market, with fear gripping investors this week as bond yields spike in the wake of signals last week from the Federal Reserve that interest rates may need to stay higher for longer than many on Wall Street anticipated.
“Bond vigilantes” unhappy about the U.S. deficit have been demanding higher yields, while households and hedge funds have been piling into Treasury securities since the Fed began raising rates in 2022.
Much hinges on how painful things get if rates stay high, which would ratchet up borrowing costs for households, companies and the U.S. government as the Fed works to get falling inflation down to its 2% target.
Hedge-fund billionaire Bill Ackman this week said he thinks Treasury yields are going higher in a hurry, as part of his bet that the 30-year Treasury yield
BX:TMUBMUSD30Y
has more room to climb.
The 10-year Treasury edged lower to 4.572% on Friday, after adding almost 50 basis points in September, which helped the stock market reclaim some lost ground in a dismal month, while the 30-year Treasury yield pulled back to 4.709%, according to FactSet.
The Dow Jones Industrial Average
DJIA
posted a 3.5% decline in September, its biggest monthly loss since February, the S&P 500 index
SPX
fell 4.8% and the Nasdaq Composite Index
COMP
shed 5.8% for the month.
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Chinese banks issued a higher-than-expected amount of new loans in August, as Beijing tapped the nation’s financial institutions to step up support for the cooling economy.
New yuan loans extended by banks in China reached 1.36 trillion yuan ($185.20 billion) in August, up from CNY345.9 billion in July, the People’s Bank of China said Monday.
The result beat the CNY1.2 trillion expected by economists in a Wall Street Journal poll.
Total social financing, which includes both bank and nonbank credit, was CNY3.12 trillion in August, up sharply from CNY528.2 billion in August, the central bank said.
M2, the broadest measure of money supply, rose 10.6% in August from a year earlier, lower than July’s 10.7% increase and the same growth rate anticipated by the surveyed economists.
Write to Singapore Editors at singaporeeditors@dowjones.com
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China’s property developers are under duress again, re-igniting concerns about a debt crisis. But with a faltering economy and diminished confidence among households and companies, China debt watcher Charlene Chu, senior analyst at Autonomous Research, worries the ingredients are there for a broader financial crisis for the first time.
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The recent rise in long-dated Treasury yields boils down to mostly one single thing, which is higher real rates resulting from changing expectations for U.S. economic growth, according to Joseph Kalish, chief global macro strategist at Ned Davis Research.
Kalish attributes 90% of the increase to that factor alone. He points out that 5-
BX:TMUBMUSD05Y,
7-
BX:TMUBMUSD07Y,
10-
BX:TMUBMUSD10Y
and 20-year Treasury yields are all up significantly since 2021-2022. On Tuesday, the 10-year rate finished at 4.327%, slightly off its almost 16-year high. Meanwhile, the 5-year Treasury yield, which reflects the intermediate part of the Treasury curve known as the belly, has trended higher as traders and investors factor in prospects for a stronger U.S. economy beyond the next few years.
Ordinarily, Treasury yields tend to rise based on a range of factors, such as the possibility of higher future inflation and investors’ demands to be compensated for that risk. This time around appears to be a bit different.
Real rates, as measured by yields on Treasury inflation-protected securities, reflect the market’s view of how the economy is performing after subtracting inflation. In other words, they present a purer read on how the U.S. is likely to do when inflation isn’t a factor. And right now, real yields are rising on the strength of recent economic data as investors hold out some hope for a soft landing, or scenario in which inflation comes down on its own without a recession or major jump in unemployment, or even no landing at all.
“Bond yields have come a long way in a short period of time,” Kalish wrote in a note distributed on Tuesday. “Nearly all of the rise has been due to higher real yields,” though an increase in the supply of U.S. government debt is also likely playing a contributing role.
As of Monday, 10- and 30-year Treasury yields
BX:TMUBMUSD30Y
had respectively jumped by 105.4 basis points and 91.7 basis points since early April, and closed at their highest levels since Nov. 6, 2007, and April 27, 2011. However, they ended lower on Tuesday at 4.327% and 4.410% as investors and traders took a break from the aggressive selloff of long-dated government debt seen over the past week.
The runup in Treasury yields has been blamed for a stock-market pullback, which has seen the S&P 500
SPX
retreat 4.4% so far in August. The large-cap benchmark remains up 14.3% so far this year.
As traders and investors await Federal Reserve Chairman Jerome Powell’s Jackson Hole address on Friday, Kalish wrote that “the market has been consistently underpricing the risk of additional rate hikes and overpricing the speed of rate cuts.” Powell will be “pleased at the progress on goods inflation, hopeful that the labor market is getting into better balance, but concerned about the economy growing faster than trend.”
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There is room for a continued selloff in U.S. Treasurys which has already pushed 10- and 30-year yields to their highest levels since 2007 and 2011, according to researchers at Barclays.Though the recent selloff took a breather on Friday, the steady drive higher in long-dated yields which unfolded this week left observers warning that the era of low rates may be firmly behind the U.S. as a new normal appears to take shape in the bond market. Long-term rates yields are just beginning to enter ranges that have been historically consistent with where they traded during the early 2000s.Read: Why Treasury yields keep rising,…
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