Wall Street banks amass trea­suries

The Pak Banker - - FRONT PAGE -

Wall Street's big­gest bond deal­ers are amass­ing the most Trea­suries since March last year in a sign of con­fi­dence that a Fed­eral Re­serve's tight­en­ing cy­cle of higher in­ter­est rates will be or­derly.

JPMor­gan Chase & Co., Cit­i­group Inc. and the 20 other com­pa­nies that trade with the Fed in­creased their hold­ings for a fourth week to a net $69 bil­lion in data re­ported Thurs­day. Traders see about even odds of the first rate in­crease since 2006 in Septem­ber be­fore a La­bor Depart­ment re­port Fri­day forecast by econ­o­mists to show U.S. em­ploy­ers in July added more than 200,000 jobs for the fifth month this year and wages in­creased.

In­vestors have been en­cour­aged by Fed Chair Janet Yellen's stated in­ten­tion to raise in­ter­est rates at a grad­ual pace, which has been backed by the col­lapse in oil prices. Reg­u­la­tory re­quire­ments that ne­ces­si­tate banks to hold more high-qual­ity as­sets have also con­trib­uted to the jump in pri­mary-dealer hold­ings of Trea­suries, ac­cord­ing to Barra Sheri­dan, a rates trader at Bank of Mon­treal in Lon­don.

"As much as it's about reg­u­la­tion, the rate path will be very, very, slow and grad­ual," Sheri­dan said. Fed of­fi­cials "are not go­ing to be em­bark­ing on an ag­gres­sive tight­en­ing cy­cle. Peo­ple don't mind buy­ing Trea­suries at these lev­els be­cause they are still at­trac­tive on a global ba­sis."

Bench­mark U.S. 10-year note yields were lit­tle changed at 2.23 per­cent as of 7:02 a.m. New York time. The yield on Ger­many's 10-year bunds, the euro area's bench­mark sov­er­eign se­cu­ri­ties, was at 0.70 per­cent. Pri­mary deal­ers added $27.2 bil­lion to their Trea­suries hold­ings in the week to July 29, the big­gest in­crease since Oc­to­ber, data re­ported Thurs­day show. On July 21, the Vol­cker Rule came into full ef­fect, which re­stricts pro­pri­etary trad­ing at banks and makes it more ex­pen­sive for them to ware­house debt in the ex­pec­ta­tion that clients will want to buy it.

Yellen said in con­gres­sional tes­ti­mony last month she ex­pects the cen­tral bank to raise its bench­mark rate this year, while em­pha­siz­ing the pace of in­creases will prob­a­bly be grad­ual. U.S. bench­mark bor­row­ing costs will in­crease by about 60 ba­sis points over the next year, ac­cord­ing to mar­ket-im­plied pol­icy rates.

Em­ploy­ers added 225,000 jobs in July, fol­low­ing a 223,000 in­crease the pre­vi­ous month, ac­cord­ing to a Bloomberg sur­vey of econ­o­mists. Av­er­age hourly earn­ings climbed 2.3 per­cent from a year ear­lier, a sep­a­rate sur­vey showed.

Crude oil has tum­bled more than 50 per­cent in the past 12 months, while con­sumer prices in the U.S. in­creased 0.1 per­cent in June from a year ear­lier. Tum­bling in­fla­tion ex­pec­ta­tions have also stoked de­mand for longer-ma­tu­rity Trea­suries. The gap be­tween two- and 30-year yields -- known as the yield curve -- com­pressed to the nar­row­est since April this week. The yield dif­fer­ence be­tween two-year notes and sim­i­lar-ma­tu­rity Trea­sury In­fla­tion Pro­tected Se­cu­ri­ties, a gauge of trader ex­pec­ta­tions for con­sumer prices over the life of the debt, touched a six-month low of 0.58 per­cent Thurs­day.

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