Treasury Closing Summary (December 19):
More tit-for-tat business as usual in D.C. saw the stock rally fade on Weds, after Obama said he would veto any "Plan B" from the Republicans without a "balanced" solution. That increase in acrimony and decrease in cooperation appeared to forestall any agreement before the Xmas break. A decline in housing starts and lower back revisions also caused a pause in risk-on trade, helping cap yields after yesterday's flurry of fiscal optimism. This set the table for appetite for the well-received 7-year auction, while the euro reversed its sharp gains over $1.33.
It all started out innocently enough, extending the "Santa Claus" rally on stocks thanks gains on global stocks, solid earnings from Oracle and lingering hopes for a cliff deal in D.C. But housing starts pulled back 3.0% in Nov from recent (downwardly revised) gains in Oct and Sep, though this alone didn't take too much shine off the rally since permits were very strong. European stocks climbed after the German Ifo firmed and the Greek debt rating was upgraded by S&P, but U.S. shares limped lower by session end. Oracle climbed over 2% in the pre-market thanks to strong business software sales, while Fedex rallied on solid earnings ex-Sandy. Alcoa slipped after Moody's put the company's ratings on review. UBS gained after settling the Libor manipulation probe for $1.5 bln. In M&A, Knight Capital agreed to be bought by Getco for $1.4 bln, while SPX Corp is mulling a Gardner Denver bid for $4.2 bln.
The fiscal chasm has widened since "Plan B" was introduced and both sides have not held direct talks since Monday night, according to a Politico.com article. That back-up plan was introduced Tuesday and Obama has since offered to veto it, a move which Boehner's press secretary subsequently labeled "bizarre and irrational." The article suggestsed that Obama will head off to Hawaii for vacation with his family on Friday, barring a change in Congress's schedule. It would appear that a pre-Xmas solution is further away now, especially after duelling pressers below:
The White House said "Plan B" tax proposal from Republicans does not meet Obama's "balance test" for the fiscal cliff and he would veto it, if passed. Meanwhile, Obama urged Republican leadership to resolve the remaining differences and find a reasonable solution "today," later elaborating on the negotiation deficit in his presser on gun control. House Leader Boehner made it very short and sweet challenging Obama to meet the "balanced" approach that he remains shy of on the fiscal front given his proposal for $1.3 tln in revenue gains and $0.8 tln in spending cuts. Otherwise, the "Plan B" maintanence of tax relief for the 99.6% of Americans (below $1 mln) will pass the House and without Presidential agreement will likely fail in the Senate. Obama will then be forced to explain tax hikes for the majority of its citizens by 2013. Looks like a showdown on Capitol Hill before any additional compromise now.
Yields pulled back from highs after Nov housing starts came in a bit shy of expectations and were accompanied by a downward revision in Oct, while fiscal pessimism supplanted overnight optimism. The 2-year yield reversed back under 0.28%, while the T-note yield had backed up to the 1.83% prior to the data, before easing below 1.77%, then settling near 1.80%. The 2s-10s spread remained steep near +152 bp, but inside Tues wides over +157 bp. Longer dated Treasuries continue to underperform following the FOMC meeting and announcement of QE4 and threshold targets. Weighing on the 10- and 30-year sectors are increased worries over inflation given the Fed's QE operations that will add another $1 tln to the balance sheet in 2013. There was some talk the FOMC could announce an increase in monthly purchases from the $45 bln currently on tap.
Treasury's $29 bln 7-year note sale was decent with the note awarded at 1.233%, just through the 1.235% rate at the bid deadline. There were $78.8 bln in bids for a 2.72 cover compared to last month's 2.82. Indirect bidders took 39.9% versus 39.1% previously. Direct bidders took 23.1%, a record high, versus November's 19.7%, while primary dealers took 37.0% versus 41.2%.
PIMCO's Gross said labor force participation rate is key to Fed and market moves. NY Fed Op-Twist purchased $1.89 bln bonds from Feb 2036 - Nov 2042. NYMEX crude traded over $89.0 bbl after EIA crude draw, mixed product inventories. EUR barriers at $1.33 were extinguished, before reversing to $1.3240. MBA mortgage market index sank 12.3%; purchases -4.8%, refis -13.8%.
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