- 10-year T-note prices jump on Iranian retaliation
- 10-year T-note auction
- USMCA is delayed by its referral to more Senate committees
- ADP U.S. jobs expected to recover to a more normal level
10-year T-note prices jump on Iranian retaliation — The 10-year T-note market goes into today’s Treasury auction with support from safe-haven demand after Iran last night launched a rocket attack on US-Iraq airbase. March 10-year T-note prices last night rallied by +19 ticks. Crude oil prices were up as much as 4% last night on the Iranian rocket attack.
The markets will be watching to see if President Trump thinks Iran’s retaliation is significant enough to draw a new U.S. military attack on Iran. The markets can deal with some minor tit-for-tat military action between the U.S. and Iran, but the risk is that it spirals into an all-out war. There is little doubt that the U.S. military would like to neutralize Iran’s nuclear sites now that Iran has said that its nuclear activities are no longer limited by the nuclear agreement.
The 10-year T-note yield last night fell to a 1-month low of 1.76% on the news of the Iranian rocket attack. However, the 10-year T-note yield so far remains within the narrow 2-1/2 month range of 1.68%/1.97% seen since October. The T-note market has been becalmed by the Fed’s indication that there will be no change in its federal funds rate target unless there is a “material” change in the U.S. economic outlook.
The US/Iran tensions have so far not been severe enough to constitute a material change. March WTI crude oil prices have rallied by about $3.50 or 6% since the U.S. military’s targeted killing of Iranian General Soleimani last Thursday night. The rally in crude oil prices has not yet been large enough to put a significant dent in the global economy. In addition, the global stock markets have so far shown only a minor downside correction on the US/Iran tensions. Still, if the US/Iran military action worsens, then there is the possibility for a dip in the global economy that might require a Fed rate cut.
Since the U.S. attack on Iranian General Soleimani last Thursday night, the markets have boosted expectations for the Fed’s easing in 2020 by 5.5 bp. Specifically, the Dec 2020 federal funds futures contract is now indicating market expectations for a total of 29 bp of easing by the end of this year, which is equivalent to 1.2 rate cuts.
10-year T-note auction — The Treasury today will sell $24 billion of 10-year T-notes in the second and final reopening of the 1-3/4% 10-year T-note of November 2029 that the Treasury first sold in November. The Treasury will then conclude this week’s $78 billion coupon package by selling $16 billion of reopened 30-year T-bonds on Thursday.
The 12-auction averages for the 10-year are as follows: 2.42 bid cover ratio, $13 million in non-competitive bids, 4.6 bp tail to the median yield, 39.7 bp tail to the low yield, and 57% taken at the high yield. The 10-year is of average popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 60.9% of the last twelve 10-year T-note auctions, which nearly matches the median of 60.8% for all recent Treasury coupon auctions.
USMCA is delayed by its referral to more Senate committees — The Senate Finance Committee on Tuesday quickly approved the USMCA bill with a vote of 25-3. However, Senate Majority Leader McConnell has now decided to give seven other Senate committees the chance to review the bill, which will substantially slow its progress. A GOP staffer quoted by Bloomberg said that the earliest the bill could now be approved by the full Senate would be late next week. Finance Committee Chairman Grassley says he expects the bill to be passed by the end of January.
However, the timing of the USMCA depends heavily on whether House Speaker Pelosi transmits the articles of impeachment to the Senate. A further delay in the articles of impeachment could give the Senate time to pass the bill in January. However, as soon as the Senate receives the articles of impeachment, then the Senate will be required to devote its full attention to President Trump’s trial, thus putting the USMCA on the back burner if it has not yet been passed.
The impasse continues over the articles of impeachment. Senate Majority Leader McConnell on Tuesday said he has the votes in the Senate to approve the same Senate trial rules that applied for former President Clinton’s trial. Nevertheless, Speaker Pelosi is so far still holding out in an attempt to force Mr. McConnell to hold a trial with witnesses and the submission of documentary evidence. However, under the Clinton trial rules, the Senate could still vote to hear witnesses after the trial begins.
ADP U.S. jobs expected to recover to a more normal level — The consensus is for today’s Dec ADP employment report to show an increase of +160,000, which would be mildly below the 12-month trend average of +173,000. The job figures are expected to stabilize following the GM strike that caused volatility in the ADP and payroll reports in October and November. Still, the ADP job series has been weak in recent months with a 6-month average of only +117,000. Today’s expected report of +160,000 would be the strongest report since last April.
On the labor front, the markets are mainly looking ahead to Friday’s Dec unemployment report. The consensus is for Friday’s Dec payroll report to show an increase of +160,000, which would be closer to normal after returning GM strikers helped produce an unusually strong Nov payroll report of +266,000. Payroll growth has been substantially stronger than ADP growth in recent months with an average monthly increase in payrolls of +196,000 over the last six months versus only +117,000 for the ADP report. The consensus is for Friday’s Dec unemployment rate to be unchanged from the 50-year low of 3.5% posted in September and November.
