Market 03/25: Record $66B 2Y bonds sold amid rising public spending

Auction of USD 66B 2Y Treasury bonds not a failure but not overly positive

• High Yield: 4.595% (market yield before auction: 4.59% | Previous session High Yield: 4.691%).

  → Light Tail at 0.5bps, however, higher than the average of the last 6 sessions (0.2bps)

  • High Yield allocation ratio: 49.16% (previous session: 72.98%)

• Bid-To-Cover ratio: 2.62 (previous session 2.49)

• Bid components (competitive results):

  • 65.76% of successful bid value from foreign investors (previous session: 65.16%)

  • 13.36% from Dealers (previous session: 14.73%)

Notably, this is the largest 2Y bond auction value ever:

• Fiscal deficit issue is forcing Treasury to ramp up debt issuance.

• But high interest rate environment doesn't allow Yellen to issue long-term debt.

• Therefore, short- and medium-term debt issuance is being ramped up.

Fed officials' statements: Cook, Goolsbee

1. Cook: Fed must be cautious in cutting interest rates

• Early rate cuts risk bringing inflation back

• Late rate cuts could cause unnecessary harm to the economy

• Fed is gradually achieving balance between inflation risks and employment goals.

2. Goolsbee: Sees 3 rate cuts this year

• Main issue for inflation is housing.

• Need more evidence that inflation is declining

• Cutting rates too early could disrupt the inflation control process

• Fed is aware of CRE risks, but does not see it as a widespread issue

US House approves additional USD 1.2 trillion government funding - Budget deficit rises to 6.4% GDP

US Congress passes spending bill 1.2 trillion USD in the early morning of 03/23 to maintain government operations until September

• Senators previously missed the midnight deadline on 03/22 to pass the bill, meaning the US government was shut down for a few hours from 0am on 03/23.

• Read more at: Role of Monetary Interest Rate Policy vs Fiscal Policy in the current context

This bill leads to budget deficit reaching -6.46% of nominal GDP.

• This is a high level compared to general data, though still lower than post-financial crisis... but note, currently, the economy has no crisis!

Budget deficit of 6.46% would equate to 8% unemployment rate if compared to correlations from previous periods (excluding Covid).

• However, correlation does not guarantee exact macroeconomic balance relationship.

US new home sales unexpectedly plunge in February

February new home sales decline -0.3% M/M (much lower than expected +2.3%).

• Median new home price down -7.6% Y/Y to 400,500 USD, average price is 485,000 USD

• Part of the home price decline due to new home inventory up +463,000 units

The number of homes on Redfin with price cuts this year is increasing at a much faster rate than in previous years.

Manufacturing and business activity indicators from the Fed

Dallas Fed Manufacturing Index down -3.1 points to -14.4 in March.

• Manufacturing Index down to -4.1 (image below)

• New Orders Index down to -11.8

• Both Prices Paid and Prices Received rose, up 5.7 points to 21.1 and up 10.2 points to 11.0, respectively.

National Activity Index February: +0.05 M/M (Chicago Fed), higher than estimate -0.34 and previous -0.54

Crypto Market: institutional investors long, hedge funds short + Bitcoin Depot earnings update

Institutional investors' net long Bitcoin positions and hedge funds' net short Bitcoin positions at record levels → possible squeeze coming soon.

Bitcoin Depot 2023 earnings:

• Revenue: 689 million USD, +7% Y/Y

• Net income: 1.6 million USD, -54% Y/Y

• Gross profit: 87.8 million USD, +64% Y/Y

• Gross margin: 12.8%, up from 8.3% last year

Key events for the week of 03/25 - 03/29

1. New home sales data - Monday

2. Conference Board Consumer Confidence - Tuesday

3. US Q4 GDP - Thursday

4. February PCE inflation - Friday

5. Fed Chair Powell speech - Friday

6. Total 5 Fed officials speaking this week

• Earnings release schedule for companies this week:

Other news

1. China bans Intel and AMD CPUs in government computer systems.

• Right after this news, Intel stock down -2.9% and AMD down ~-1%.

• In response, the US immediately imposes tech sanctions on China's Wuhan Xiaoruizhi Science and Technology Co., Ltd.

2. Trump's penalty related to allegations of inflating asset values to defraud lenders and insurers reduced from 454 million to 175 million USD

• Trump's son, Eric, co-defendant in the fraud case, accuses AG Letitia James of trying to bankrupt his father with the judgment.

3. Boeing CEO Dave Calhoun to step down by year-end amid company's production operations overhaul.