The Potential for 100-Year US Government Debt

Immediately after assuming his post as Treasury Secretary, Steve Mnuchin began to discuss with his staff the prospect of issuing 50 and 100-year government bonds. This would mark a historic shift for the $14 trillion market, which has been resistant of issuing debt with maturities longer than 30 years. However, it seems as if the US will be following in the steps of Belgium, France, the UK, Austria, and Mexico, who all have sold longer-dated maturites.
Changes in US government bond issuance have previously been explored in depth with the Treasury consulting with investors and dealers, placing an emphasis on regular and predictable issuance to reduce financing costs. It took nearly three years for the Treasury to introduce floating-rate notes, first sold in 2014. The Treasury Borrowing Advisory Committee, a group of industry participants that advises on government debt issuance, is looking at issuance models and noted in minutes from its meeting on January 31 that longer-term strategies had historically performed better amid rising interest rates. The bond market expects the Federal Reserve will raise interest rates this summer and later this year.
Some primary dealers, which underwrite Treasury debt sales, have offered support for the idea but highlighted potential stumbling blocks. Mr Mnuchin stressed that he was not making any “formal announcement” on whether the Treasury would issue longer-dated bonds but he had “begun to talk to staff” about it. In comments before he took office he had indicated that he was open to the idea. The Treasury’s borrowing costs have risen since Donald Trump was elected president on November 8, with the 30-year yield rising from 2.6 per cent to 3 per cent on Thursday.

MarketWatch

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Takeaways from International Petroleum Week

The International Petroleum Week, hosted in London, is an excellent opportunity to gauge the standing of the oil industry, with traders and executives making the trip from around the world. Only a year ago, the event boasted a somber mood, as oil prices hovered around $35 a barrel; this time around, the mantra of “lower for longer” has been replaced by “wait and see”.

Crude prices may have risen on a very narrow path, with the international benchmark Brent sitting between a $53 and $58 range, but there are still skeptics out on the horizon. Analysts from Citi, who were in attendance, see the potential for $70 a barrel by the end of the year, citing heavy profit-taking by hedge funds on massive shorts.
If anyone in the industry had a great time during the price crash, it was the oil traders. Through a method called a “carry-trade”, which involves buying cheap, physical oil and storing it until prices recover, they reaped the benefits of increased volatility. Though volatility seems to be waning and prices are on the rise, some of the world’s biggest oil companies are looking to get into the game or expand their current operation.

FT

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Inflation Picks Up In Canada

Consumer prices picked up in Canada, causing CPI to hit 2.1% form a year earlier and up from 1.5% in December. Economists had forecasted inflation to hit 1.6%, which poses a drastic increase in price. The hiking in inflation can be attributed to the surging gasoline prices and the new carbon levies.  Gasoline prices have posted a 21% gain from the earlier year. Ontario has started a new cap and trade system but it is still unclear how much that system is impacting the prices.

Excluding gasoline, inflation still went up 1.5% year-over-year in January. The BoC is still unlikely to make any changes to its policy rates due to the fact that there is still stability in core inflation. The three measures that are used to measure core all remained below 2% and averaged around 1.6%. The BoC is still concerned with underlying weakness of the economy and has stated that it will continue to monitor core inflation to keep it in check.

Bloomberg

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Volkswagen Sets Caps on Executive Pay

Following its biggest ever loss in 2015, and a tumultuous scandal, Volkswagen has posted 2016 profits and is projecting to see slightly higher new car sales this year. The company has taken measures to quell uneasy investors and to ensure fairness and meritocracy within their c-suite. One recent initiative that they have taken is to set a cap on their executive pay. Executive packages will be limited to 10 million euros while packages for other board members will be limited to 5.5 million euros. Former executive, Martin Winterkorn walked away from the scandal with a whopping 17.5 million euros due to large bonus payments. This will no longer be the case.

Volkswagen reported a net profit of 5.1 billion euros last year compared to their 1.6 billion euro loss from 2015. The company has a promising future and is well positioned to make a comeback from its massive emissions-cheating scandal.  Volkswagen beat out Toyota in car manufacturing and is projecting a 4% increase in revenue this year. However on the flip side, Volkswagen still has many legal hoops to go through, but with that being said, they have put aside a total of 22.6 billion euros for fines, fixing and/or buying back defective vehicles.

WSJ

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France’s Presidential Election hit French Bonds

Investors’ speculations on the outcome of the upcoming French presidential election is causing volatility in the European bond markets.

On Monday, a poll showing Marine Le Pen in the lead for April’s first round caused yields on French 10-year bonds to rise to 1.064%. Investors feared that the euro skeptic Le Pen would take France out of the Eurozone and a potential “Frexit” would take place.

The sell-off is seen as “excessive” as the rally continued through Tuesday. However, the latest polls give her only about a third of the vote in the second round, which pits Le Pen against her leading rival Emmanuel Macron, a centrist former economy minister. Additionally, French centrist Francois Bayrou said on Wednesday to offer an alliance with Macron to help him reach the runoff in May’s election. Bayrou’s support for Macron pushed the French bond yields to fall 5 basis points.

The Bund yields hit record lows, as within the 19-nation Eurozone, investors always rush into strong members like Germany whenever a risks of a breakup of the currency emerge. The gap between French and German 10-year borrowing costs reached the widest point since May 2012.

WSJ

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HP sales rose after a prolonged slump

HP Inc. reported a 4% increase in revenue in the quarter that ended Jan. 31, with notebook PCs jumping 16% and its line of gaming products OMEN gaining traction. HP is widely known for producing high-quality PCs and printing materials, both of which dominate HP’s revenue and profit for the last quarter. Its PCs shipment grew 6.6% compared to a year earlier whereas that of other suppliers fell 1.5%.

The company stock rose 50 bps after the earning reports were released Wednesday. Facing declining demands for desktop computers, notebooks, the company is targeting to spur growth in the high-end corporate notebooks. In the printing business, even though HP is struggling to compete with other producers of less-expensive ink and toners, its new printer called the Sprocket, a palm-sized product that is designed to pair with smartphone was reported to sold well over the holidays.

Furthermore, with the gaming industry generated a total of $99.6B in 2016, up 8.5% compared to 2015, HP’s earnings and growth prospective for 2017 seems promising as the company is expanding further its lines of gaming system.

WSJ

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Tesla Charges Onward

This past Wednesday, Tesla has issued a statement claiming they want to set out an aggressive launch of their Model 3 Sedan by the end of the year. Beginning in July, Tesla hopes to amp up their production of the automobile to 5,000 units a week. The $35,000 sedan is part of Mr. Musk’s bet to transform Tesla from a luxury car maker into a sustainable energy company that sells electric vehicles to the masses, offers solar power to generate energy, and produces large batteries to store that power at home and offices. Tesla CEO Elon Musk made remarks that Tesla might need additional equity funding to compensate for the fact that there will be such a boost in supply to match the growing demand for a fully electric automobile. The reason Tesla is struggling with equity is exactly for this reason. Musk hopes two or three locations for its massive battery factories, called “gigafactories” will be built later this year. Tesla is finishing its first gigafactory in Nevada, which will have the capacity to make batteries for a million vehicles a year.
Tesla’s projections Wednesday came as it reported its fourth-quarter loss narrowed to $121.3 million, a return to red ink after posting its first quarterly profit three months ago. Revenue jumped 88% to $2.28 billion, ahead of analysts’ expectations. As Tesla sales remain constant, a new “danger” is approaching in the form of labor unrest. Tesla hourly laborers have begun a movement to start a union to protect their rights.

WSJ

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