Aurelia Butler

(Reuters) – The U.S. Treasury Department is likely to begin gradually increasing the size of its note and bond auctions when it announces its financing plans for the coming quarter next week, in order to finance higher spending as its tax revenues decline.The Treasury has largely relied on sales of bills since the debt ceiling was suspended in June to replenish its cash holdings and fund its growing budget deficit.But to keep the proportion of bills within the recommended range of its overall debt load, the government will also need to increase the size of coupon-bearing debt sales.Some market participants had worried that a surge in Treasury bill issuance after the debt ceiling was temporarily lifted could adversely impact bank reserves and lead to tighter credit conditions, but these negative impacts have not materialized. The bills have seen strong demand from money fund investors.Analysts said the Treasury’s note and bond auction increases are likely to be measured and should not disrupt the market either, with auction sizes holding below the peaks reached in 2020-2021, at least in the near-term. The government quickly ramped up issuance in 2020 to pay for COVID-19-related spending.”It’s gradual,” said Steven Zeng, U.S. rates strategist at Deutsche Bank (ETR:DBKGn). “I think the market’s not going to have any function issues.”WORSENING DEFICITThe government is facing falling revenues as its outlays also increase. The Treasury earlier this month posted a $228 billion budget deficit for June, up 156% from a year earlier.”Financing needs were higher in fiscal year 2023 than what I think many were anticipating,” said Meghan Swiber, a rates strategist at Bank of America (NYSE:BAC).”They have to grow coupon auction sizes – not just at the August refunding, not just at the November refunding, but also at the February refunding as well, because they are ultimately trying to balance this supply picture between bills vs coupons and this growing financing need,” Swiber said.The Treasury Borrowing Advisory Committee (TBAC) recommends that bills make up 15-20% of the total marketable debt. This ratio has grown to around 18% and analysts say it may briefly surpass the 20% level in fiscal year 2024, before coming back down.Ben Jeffery, an interest rate strategist at BMO Capital Markets, notes that seven-year and 20-year auctions may be increased by less than other maturities. These issues suffered from relatively lower demand in 2020-2021 as they have a less established buyer base.The Treasury will release its quarterly borrowing requirement Monday afternoon, and its refunding news comes Wednesday at 0830 ET/1230 GMT.QT WILL INFLUENCE BORROWING NEEDBofA’s Swiber added that the Federal Reserve’s quantitative tightening (QT) program, in which it is letting bonds mature without replacement to shrink its balance sheet, is also likely to impact how much the Treasury will need to borrow.”The longer that the Fed does QT, the more the Treasury ultimately needs to rely on the public to finance that,” said Swiber.The Treasury may also give an update on its plans to launch a buyback program, which is expected to begin in the first quarter of 2024.The Treasury surveyed dealers about their opinion on how some details of the program should work ahead of the August refunding. The buybacks are meant to improve liquidity in the market by allowing Treasury to buy back less traded securities and issue more in the most liquid benchmark issues. More

Bonds issued by some of the world’s poorest economies have been among the best performers in debt markets this year, helped by signs that global interest rates are close to peaking and breakthroughs in restructuring talks in countries pushed into default by the shocks of the past three years.Sovereign bonds with rock bottom credit ratings of triple-C and below have delivered an average total return of 27 per cent since the start of the year, leading a rebound in foreign currency emerging market debt.“Investors got absolutely crushed last year,” said Richard House, head of emerging markets in the fixed income team at Allianz Global Investors. “But they have done better this year and it’s partly because this distressed sector has performed spectacularly well.”A rapid rise in global interest rates, soaring energy and food prices, a strong dollar and a global economic slowdown following the Covid-19 pandemic sparked a rapid sell off in “hard currency” — largely dollar-denominated — emerging market debt in 2022. This shut off most high yield economies from international financing, pushing countries such as Zambia and Sri Lanka into default and leaving many others on the brink.But progress in those countries’ previously deadlocked restructuring talks has increased investors’ expectations of how much of their money they can expect to recover. Meanwhile, support from the IMF has helped stave off defaults elsewhere.While a broad swath of emerging markets remains mired in debt distress, the resulting rally has brought a glimmer of hope to some countries — and bumper gains for bondholders.“Without question we have had some good news from the IMF and tangible progress towards successful sovereign debt restructuring over recent months, from the likes of Sri Lanka, Suriname, Zambia and Pakistan,” said Paul Greer, emerging market debt and FX portfolio manager at Fidelity. Greer said he had become more cautious of the distressed sector given the recent rally, but remains overweight some countries in default including Ukraine and Zambia, which both missed payments in 2022 and 2020 respectively. Zambia had been in tortuous negotiations owing to a lack of agreement by China, the country’s largest creditor, and other western leaders over a proposal to reduce by about half the value of almost $13bn of external debts, but an agreement was finally reached last month.Countries flirting with default have also experienced encouraging developments. Pakistan surprised markets by securing $3bn in short-term financing from the IMF late last month, offering the crisis-hit economy some reprieve. “You came into this year with cash prices at the lowest level since 1998,” said Thys Louw, emerging market debt portfolio manager at investment company Ninety One. “People felt that as funding markets get shut off you’ll have a wave of defaults, but also the expectations for eventual recovery should you get to a restructuring were incredibly low,” owing to the Chinese involvement and a more combative IMF. “A lot of the stories people were worried about have shown some signs of improvement,” Louw added. Countries are generally considered to be in debt distress when the gap in borrowing costs rises to more than 10 percentage points above US Treasuries, making it prohibitively expensive for countries to raise external financing, increasing the likelihood of eventual default.On that measure, 20 countries in JPMorgan’s emerging market sovereign bond market had fallen into debt distress by September last year, up from eight at the start of 2021. However, this year’s rally has seen the bond yield spreads of five countries fall out of distress, including Kenya and Nigeria, bringing them closer to the possibility of borrowing again on international markets. “The prospect of market access that felt very very remote has increased a lot,” Thouw said. “It’s not that the good days are back, but that the good days may come again.” Nigeria’s bonds have rallied by 6 per cent this year, as early moves by its new president put the country on a more orthodox economic trajectory. Bola Tinubu’s decision to scrap the fuel subsidies that cost Nigeria more than $10bn last year was viewed by investors as a key measure to help stave off default, alongside a decision to devalue the currency. Kenya had been a big worry for markets with a $2bn bond maturing next summer, but its foreign currency debt has rallied since the IMF expanded its programme in May and it secured a $500mn syndicated medium-term loan facility earlier this month.The sector has been helped by the long-dated maturities of its debt. Research by Morgan Stanley showed that 15 per cent of emerging market sovereign high yield debt will mature before the end of 2025, compared with 35 per cent for European high yield credit, and 59 per cent for Asian high yield. But for countries that need to refinance maturing debt next year — including Egypt, Nigeria, Tunisia and Pakistan — the stakes are high. According to analysts at Bank of America, they need to deliver “very convincing reforms” in order to avoid making a potential default a self-fulfilling prophecy. Credit rating agency Moody’s has downgraded the rating of 13 countries in JPMorgan’s EM sovereign bond index in the past 18 months, while only four have been upgraded. “In general, we are still at a stage where we are seeing more downside than upside pressure” said Marie Diron, managing director for global sovereign risk at Moody’s. More

Travellers determined to take to the skies despite soaring ticket prices have pushed airline profits to fresh heights, as resilient consumer spending buoys the global economy.As they reported record profits on Friday, British Airways-owner IAG said trips across the Atlantic and to leisure destinations had been particularly popular “as customers prioritise holidays”, while Air France-KLM said high-spending holidaymakers were filling business class cabins. The strong bookings — reported as temperatures hit new records and the UN secretary-general warned of “global boiling” — defied a sharp rise in air fares, which have risen about 30 per cent in Europe this year. In the US, United reported a 42 per cent increase in revenue from flights to Europe in the latest quarter compared with the same period last year while Delta reported a 65 per cent surge in sales of transatlantic flights. “Consumer spending has remained resilient with spend on experiences and travel remaining a focus,” said Mastercard chief executive Michael Miebach this week as the payments company reported that cross-border spending by its card users had reached 154 per cent of 2019 levels in the second quarter.Royal Caribbean, one of the world’s largest cruise lines, on Thursday said its business was “firing on all cylinders” because of “exceptionally strong” demand for cruises and a “step change” in bookings and prices. 

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Consumers’ willingness to spend in the face of higher prices and rising interest rates is raising hopes of the US avoiding a recession. US GDP growth accelerated to a better-than-expected 2.4 per cent in the second quarter, with a 1.6 per cent rise in consumer spending also surpassing expectations. From Colgate-Palmolive to Coca-Cola, companies have this week reassured investors that the “resilient consumer” is still spending. UK cinemas have been at their busiest for four years as Barbie and Oppenheimer hit the screens last week. In the US, cinemas had their strongest opening weekends this year. Although many households have retrenched, and the poorest have been hit hard by soaring food and energy costs, consumption has held up better than many had expected in the US, UK and eurozone.“In numerous economies, consumers have not yet drained the stock of excess savings they accumulated during the pandemic; this could further sustain the recent strength in consumption,” the IMF said this week as it upgraded its outlook for global growth.Blerina Uruci, chief US economist at T Rowe Price, cautioned that consumer spending could slow in the second half because Americans had spent most of the savings they accumulated early in the pandemic, employment growth is slowing and borrowers with student loans must resume repayments in the fourth quarter.As labour markets have cooled and wage gains have slowed, some buyers are pulling back on their discretionary spending, from furnishings to hot tubs to luxury goods. Some within the travel industry are warning that the industry boom must end. Heathrow’s boss John Holland-Kaye questioned how long people would be able to pay “extremely high” ticket prices. “Our concern is that demand cannot defy gravity forever,” he said. Additional reporting by Laura Onita and Madeleine Speed in London and Silin Chen in New York More

NEW YORK (Reuters) – Two hedge funds have placed bets that bonds issued by life insurance company Lincoln National Corp (NYSE:LNC) will fall or that its default risk will increase, due to their concerns about the company’s commercial real estate (CRE) exposure. Investors have been on high alert for losses in CRE. That sector has faced challenges since the pandemic after hybrid working arrangements led to a sharp increase office vacancies. At the same time, higher interest rates made repaying debt more challenging. In the past few months, Mill Hill Capital has taken short positions in Lincoln National’s credit, it said, while Saba Capital has held the firm’s credit default swaps, a derivative that offers investors protection against a default, a source familiar with the matter said. The source requested anonymity because the trades are not public. Lincoln declined to provide comments on the hedge funds’ positions and referred to previous remarks by its management.In May, CEO Ellen Cooper told analysts that Lincoln’s goal is to reduce leverage and boost capital. She added that the firm is “extremely comfortable” with its commercial mortgage loan portfolio and that any stress is “extremely manageable.” In a recent presentation, the company said only 2.5% of its investment portfolio is in commercial mortgage loan portfolio related to office, adding the property prices are roughly double the mortgage amounts.David Meneret, Chief Investment Officer at New York-based Mill Hill, is speculating that there could be losses in its CRE portfolio which he thinks could lead to a rating downgrade, making it more difficult for the firm to obtain new businesses and retain existing ones. He took the position in the second half of 2022 and has added more shorts since March. Lincoln has an investment-grade rating by four agencies. Fitch and Moody’s (NYSE:MCO) have a negative outlook. Moody’s did not respond to a Reuters request for comments. AM Best and S&P declined to comment on potential future rating actions.Fitch Ratings’ senior director Jamie Tucker said in an email to Reuters the agency considers Lincoln’s CRE exposure modestly below-average compared with the industry, while the quality is materially stronger. He did not provide comments on the risk of a downgrade.Mill Hill sees it differently. “The real challenge for the management team is how to navigate realized losses that will inevitably trickle in, especially with their CRE assets,” said Meneret. In April, Boaz Weinstein, founder of New York-based Saba, said in a post the firm was holding some of Lincoln’s credit default swap (CDS), and had already sold some of it. The fund still holds a bearish position, a source said. Lincoln’s CDS spread, a measure of credit risk, is 238 basis points, compared with 323 when Saba disclosed the position, meaning the perceived risk has declined. A number of Lincoln’s bonds have recovered from the lowest levels reached amid the banking crisis in March. Reuters could not determine if either fund made a profit. SHORT SELLINGSome equity investors are also bearish on Lincoln. It is the second most shorted U.S.-listed life insurer, S3 Partners said, with 3.95% of its free float shorted, behind Citizens Inc, with 6.83%. Year-to-date, shares are down 10%, although they gained 34% after Lincoln secured a deal on May 2 to transfer part of its universal life insurance and fixed annuity business portfolio to a reinsurer. It will increase its capital ratio by 15 percentage points. Lincoln reported realized losses of $828 million in its last earnings, up roughly 20% from the previous quarter and compared to $181 million in gains a year earlier.Insurers hold capital to cover potential losses. Among seven listed life insurers tracked by Barclays (LON:BARC), Lincoln was the only one which ended the first quarter below its capital target. Tracy Benguigui at Barclays said that in a recessionary scenario the company’s investments could be at risk of being downgraded which could hurt its capital, referring to Lincoln’s larger-than-peers’ investments in triple B rated bonds. “LNC is at a critical juncture to rebuild capital,” she said in a note on May 11. More

Today’s top storiesThe expansion of the Ulez clean air scheme to cover the entire UK capital can go ahead after the High Court dismissed a legal challenge brought by five of London’s 33 local boroughs.British Airways owner IAG and Air France-KLM have reported record profits. IAG’s second quarter operating profit is €1.25bn, more than quadruple the €295mn a year earlier.Donald Trump has been accused of attempting to have surveillance video footage at his Mar-a-Lago estate deleted ahead of an FBI search, according to an expanded indictment.For up-to-the-minute news updates, visit our live blogGood evening.The Bank of Japan has eased controls on its government bond market, prompting a surge in the country’s benchmark bond yields to the highest level in nine years.The central bank said it would offer to buy 10-year Japanese government bonds at 1 per cent in fixed-rate operations, widening the trading band on long-term yields. BoJ governor Kazuo Ueda said in a briefing on Friday that the central bank was “not ready” to allow yields to move freely, saying this would amount to abandoning its longstanding bond-buying policy to depress yields, known as yield curve control.European stocks and bonds fell after the BoJ’s decision. The region-wide Stoxx Europe 600 lost 0.4 per cent in early trade, having hit its highest level in more than a year in the previous session. France’s Cac 40 fell 0.5 per cent and Germany’s Dax gave up 0.3 per cent.It came after the European Central Bank raised interest rates back to their record high on Thursday. This ninth consecutive rise by a quarter-percentage point to 3.75 per cent, which matches a high last reached in 2001, could be the ECB’s last, according to the central bank’s president Christine Lagarde.“It’s a decisive maybe,” Lagarde said, adding that the ECB could pause or raise rates at its next policy meeting in September.The hope of a peak to rate rises is also fed by falling French inflation which was reported to have slowed to its lowest annual rate for 16 months on Friday, as lower energy costs reduced consumer price growth in the eurozone’s second-largest economy to 5 per cent in June.Economic growth in the US was stronger than expected in the second quarter of 2023 despite the Federal Reserve’s campaign of aggressive interest rate rises. According to preliminary figures released by the Department of Commerce on Thursday, the world’s largest economy grew 2.4 per cent on an annualised basis between April and June, better than economists’ predictions for a 1.8 per cent rate. Strong business investment in inventories and fixed assets offset a drop in consumer spending growth. This data came after the Fed raised its benchmark interest rate to the highest level in 22 years on Wednesday to help tame US inflation.Need to know: UK and Europe economyIn the property market, soaring interest rates and falling house prices are prompting buyers to make lower offers or pull out of purchases completely. Many buyers simply cannot afford mortgage rates that are now at their highest levels since the 2008 financial crisis.However, three of the UK’s largest lenders cut their mortgage rates on Thursday after a better than expected drop in inflation. Nationwide, Barclays and TSB followed in the footsteps of HSBC which on Wednesday cut the cost of 100 of its products.Players and investors have flocked to tennis’s new rival padel, building courts and opening clubs to cash in on its surging popularity. It is now the second most popular participation sport in Spain after football. The number of courts worldwide is expected to more than double to 84,000 by 2026.Three new deputy governors have been appointed to the Turkish central bank by president Recep Tayyip Erdoğan, including a former New York Federal Reserve official. This comes after Turkish inflation was forecast on Thursday to soar to almost 60 per cent by year-end.Need to know: Global economyBrazil is set to launch an ambitious green transition plan worth hundreds of billions of dollars in public and private investments, which officials hope will become the signature policy of leftwing president Luiz Inácio Lula de Silva’s third term. The package will encompass about 100 initiatives including carbon trading, the bioeconomy and infrastructure adaptation.Mongolia is attempting to win over western investors by making sweeping reforms and cutting its reliance on China and Russia. China currently accounts for 84 per cent of Mongolian exports, such as copper and coal, and Russia provides about 30 per cent of its imports, including all its petroleum products.HP, the world’s second-biggest PC maker, is working with suppliers to shift production of millions of consumer and commercial laptops to Thailand and Mexico this year. This follows moves by other computer companies, notably Dell and Apple, to diversify their supply chains beyond China.Need to know: businessRising interest rates and strong trading performance propelled Standard Chartered to a better than expected second quarter with pre-tax profit up 27 per cent at $1.6bn, beating analysts’ expectations of $1.4bn. The London-based bank also announced a $1bn share buyback scheme, adding to an existing programme of the same size, and boosted its dividend.Amsterdam-based online travel group Booking Holdings, which trades as booking.com, has offered concessions to the EU to win approval for its €1.6bn purchase of Sweden’s Etraveli. Booking announced plans to buy CVC-owned Etraveli, which runs brands such as Gotogate and Mytrip, in November 2021.Profits at ExxonMobil have taken a tumble as oil prices return to “normal”. America’s biggest oil company posted net income of $7.9bn for the second quarter, less than half the unprecedented haul of $17.9bn it reported during the same period in 2022. Shell and TotalEnergies also reported shrinking profits on Thursday.EU regulators have opened a formal investigation into claims that Microsoft is unfairly bundling its Teams video conferencing app with its popular Office software as Brussels intensifies its scrutiny of big technology groups.An investment by Volkswagen in Chinese rival Xpeng boosted shares in Chinese electric-vehicle makers on Thursday. Xpeng’s Hong Kong-listed shares climbed more than 33 per cent while those of domestic peers Nio and Li Auto rose 12 per cent and 4.2 per cent respectively.Shares in Meta rose after it reported its first double-digit revenue growth since 2021 as its AI bet began to pay off. Chief executive Mark Zuckerberg said: “It’s really good to see the decisions and investments we made start to play out.” This comes after a significant restructuring in recent months, which included cutting 20,000 jobs.Science round upHealth officials have “virtually” eliminated HIV transmission in parts of Sydney that were once the centre of the Australian Aids epidemic. The results add to evidence that prevention strategies, including testing and pre-exposure drugs, are highly effective when implemented correctly.Commentator Anjana Ahuja says the UK’s dithering over rejoining the EU’s Horizon research programme is already damaging universities. “The future of UK science now lies in the hands of a weakened government inclined to prioritise symbolism over strategic thinking,” she writes.Science editor Clive Cookson discusses the risks of a nuclear disaster at Ukraine’s Zaporizhzhia plant.A Big Read examines the works of the Google research scientists who pioneered an AI revolution by producing an architecture for processing language, known simply as the “transformer”.The ocean circulation in the north Atlantic is likely to collapse sooner than expected as a result of climate change, causing further upheaval in weather patterns around the globe, according to new analysis. The July heatwaves in North America and Europe would have been “virtually impossible without climate change”, said researchers who stressed that extreme weather events would occur with greater frequency. The World Weather Attribution group, an academic collaboration, added that human-induced warming made the recent extreme heat in China “at least 50 times more likely”.Something for the weekendTry your hand at the range of FT Weekend and daily cryptic crosswords.Some good newsThe fossilised remains of a flying reptile from the late Jurassic period have been nicknamed ‘Elvis’ as a result of a quiff-like bony crest that resembled the haircut donned by the King of Rock and Roll. The pterosaur, which was found in a German rock quarry, had a wingspan of two metres and a long jaw with many small teeth to snap up shrimp and other small fish. More