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THINK AGAIN

 

THINK AGAIN

Courtesy of Grant's Almost Daily 

Monetize this. The Treasury Department announced Monday that it projects $947 billion in debt issuance over the next three months, up 40% from a $677 billion forecast issued in May. The fourth quarter should see still more supply, with estimated marketable debt issuance of $1.216 trillion, or a further sequential increase of 28%.  

Depending on the outcome of the congressional stimulus negotiations currently underway in Washington, those figures could increase further. The Congressional Budget Office pencils in a $3.5 trillion budget deficit in the 12 months through Sept. 30, compared to just under $1 trillion in fiscal 2019. 

Of course, all that debt will need to find a home, and the Federal Reserve has pulled back from its feverish buying during the height of the pandemic. Between March 4 and June 10, the Fed bought roughly $1.6 trillion in Treasury debt, equal to more than half of the net $2.5 trillion increase in total government debt outstanding over that period. From the March peak of $75 billion a day in Treasury purchases, the Fed has since scaled back its buying pace to about $80 billion per month.  

The composition of future supply is shifting, as Treasury announced yesterday that the increased issuance will be concentrated at the back end of the curve.  Thus, while two-, three- and five-year note auctions will each rise by $2 billion through October, the 10- and 30-year auctions will increase by $6 billion and $4 billion, respectively. 

That shift toward longer-dated issuance will surely attract notice within the Eccles Building. “The Treasury is increasing pressure on the Fed to extend the duration of their purchases,” Priya Misra, global head of rates strategy at TD Securities, tells the Financial Times. “It is almost a necessity now. Without that, we could have a messy Treasury market both in terms of functioning and auctions.”

Jon Hill, rates strategist at BMO Capital Markets, noted the central bank’s shifting goals from the height of the financial panic earlier this year. “Back in March and April the Fed was focused on market functioning. Now things have calmed dramatically but we still need quantitative easing to compress long rates and lower borrowing costs.” 

In his June testimony on Capitol Hill, Fed chair Jerome Powell declared that the Fed’s government bond purchase program “wasn’t in any way about, you know, meeting Treasury’s supply. . . we really don’t think about that.” 

That proclamation may be soon put to the test. The Treasury’s Borrowing Advisory Committee noted in May that roughly 30% of outstanding Treasury debt would mature within the next 12 months. 

HOUSE OF 'LORDS

Trouble flows uphill in 2020.  The pandemic and lockdown are taking a severe toll on the retail realm, as Moody’s predicts that operating income across the sector will plunge by 25% to 30% from a year ago. 

Bloomberg reports today that pandemic-related pain among brick and mortar retailers is now taking a wider toll. With at least 25 retailers filing for bankruptcy so far this year and many others forced into survival mode, a number of outlets including J. Crew Group, Inc., Neiman Marcus Group, Inc. and Men’s Wearhouse parent Tailored Brands, Inc. have opted to file for Chapter 11 instead of renegotiating with their landlords. Data from Trepp show that 16% of retail property loans packaged into commercial mortgage backed securities were delinquent at the end of July, compared to 3.8% in January.  

 “This is now black-letter law – a debtor can cram down a landlord,” said Melanie Cyganowski, partner at law firm Otterbourg P.C. and a former bankruptcy judge, told Bloomberg. “If this becomes a tsunami of retailers rejecting their leases, it’s going to trigger another part of the sea change – the mortgages held by the landlords.”

Fallout is already visible. Retail carnage was front and center in the second quarter for commercial real estate giant and Grant’s pick-to-not-click (see the Nov. 29, 2019 issue) Brookfield Property Partners, Inc. (BPY on the Nasdaq). Brookfield reported a net loss of $1.51 billion for the second quarter, compared to a $23 million profit in the same period a year ago.  Perhaps most alarmingly, the company disclosed that retail rent collections stood at just 34% in the second quarter.  Recall that last week, the company struck a deal with its lenders to relax certain covenants governing leverage limits and fixed charge coverage ratios, in exchange for a higher interest rate and limitations on restricted payments, including dividends. 

QE PROGRESS REPORT

Another stand-pat week in the books, as Reserve Bank credit (total interest-bearing assets at the Fed) footed to $6.9 trillion, down $14 billion from last week’s reading.  That slows the three-month annualized growth rate to 29% from 44% last week, but year-over-year growth remains a  cool 84%. 

RECAP AUG. 6

New highs look to be in the offing, as another top-heavy advance pushed the S&P 500 to 3,350, within 150 basis points of its Feb. 19 high-water mark.  Treasurys were modestly bid with the 10-year yield slipping back to 54 basis points, while WTI rallied to near $42 a barrel and gold jumped to $2,074 an ounce.  The VIX closed below 23 for the first time since Feb. 21. 

- Philip Grant

Image by PublicDomainPictures from Pixabay.


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