- U.S. pending home sales expected to show a solid increase
- 7-year T-note auction to yield near 2.14%
- Treasury yield curve remains above inflation expectations
- Weekly EIA report expected to show another decline in U.S. crude oil inventories tied to year-end tax considerations
U.S. pending home sales expected to show a solid increase — The market is expecting today’s Nov pending home sales report to show an increase of +0.7% m/m, adding to October’s increase of +0.2%. On a year-on-year basis, the series is expected to strengthen to +3.7% y/y from +2.1% in Oct.
The pending home sales series posted a 9-year high of 112.3 earlier this year in May, but has since fallen by a net -4.1%, providing a negative leading indicator for existing home sales. The pending home sales index fell sharply by -3.0% n Aug-Sep and then recovered by only +0.2% in Oct.
Home sales have been hurt by (1) the drop in consumer confidence that accompanied the August drop in stock prices, (2) a tight supply of homes on the market, and (3) some resistance to the sharp 3-year rise in home prices. In addition, the home sales series is likely to see some artificial weakness over the near-term due to delays in closing mortgages caused by new mortgage rules. However, home sales in general should remain at decent levels due to improving consumer wages, a steady U.S. economy, and continued low mortgage rates.
7-year T-note auction to yield near 2.14% — The Treasury today will sell $29 billion of 7-year T-notes, concluding this week’s $90 billion T-note package. Today’s 7-year T-note was trading at 2.14% in when-issued trading late yesterday afternoon, which translates to an inflation-adjusted yield of 0.71% against the 7-year inflation breakeven inflation expectations rate of 1.43%.
The 12-auction averages for the 7-year are as follows: 2.46 bid cover ratio, $14 million in non-competitive bids to mostly retail investors, 4.1 bp tail to the median yield, 11.5 bp tail to the low yield, and 46% taken at the high yield. The 7-year T-note is slightly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 55.0% of the last twelve 7-year T-note auctions, which is slightly above the average of 54.7% for all recent Treasury coupon auctions.
Treasury yield curve remains above inflation expectations — The Treasury yield curve remains above the expected inflation rates across the whole curve, meaning that Treasury investors will receive a positive inflation-adjusted yield on their investment if actual inflation turns out to match current inflation expectations. The main reason inflation-adjusted yields are positive at present is not because nominal yields are high but because inflation expectations are so low. The main reason inflation expectations are low is the sharp sell-off in crude oil and commodity prices.
The good news for the Treasury market is that as long as inflation expectations remain at such low levels, nominal yields do not have to rise to meet investor expectations for a decent inflation-adjusted return. Moreover, inflation expectations are likely to remain low well in 2016 as Iranian oil is about to flood the markets when sanctions are lifted, thus keeping inflation expectations low and providing support for T-note and T-bond prices.
Weekly EIA report expected to show another decline in U.S. crude oil inventories tied to year-end tax considerations — The market consensus is for today’s weekly EIA report to show a -2.5 million bbl decline in U.S. crude oil inventories, a +250,000 bbl rise in gasoline inventories, a +750,000 bbl rise in distillate inventories, and a +0.2 point increase in the refinery utilization rate to 91.5%.
Crude oil prices last Wednesday rallied sharply after the EIA reported that U.S. crude oil inventories fell sharply by -5.9 million bbls (-1.2%), more than offsetting the previous week’s rise of +4.8 million bbls (+1.0%). However, the bullish reaction to last week’s EIA report was mainly just year-end short-covering since the decline in oil inventories was due mainly to oil companies cutting their inventories at year-end to minimize taxes, as opposed to any fundamental decline in the oil glut. Even after last week’s decline, U.S. oil inventories were still a massive +35.1% (126 million bbls) above the 5-year seasonal average.
Meanwhile on the products front, gasoline inventories are close to neutral at -0.2% below average. Distillate inventories are ample at +15.1% above average.
