What to watch for in markets as X-date approaches

From: POLITICO's Morning Money - Tuesday Apr 25,2023 12:01 pm

Apr 25, 2023

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If you want more signs that Wall Street is getting anxious about the debt limit, take a look at short-term Treasury securities.

Investors want to avoid getting stuck with assets that could be exposed to a possible U.S. government default. Yields on one-month Treasury bills, which fall as their price climbs, dropped sharply in recent weeks as investors flocked to securities that mature before the X-date — which some big banks now estimate will land much sooner than previously expected. Meanwhile, yields on three-month Treasury bills are spiking. The spread between one-month and three-month yields is the widest it’s ever been.

The reason: “Once the X-date itself is known — or at least estimated with some degree of confidence — you do see Treasury bills that mature just after that estimated X-date demonstrate a risk premium,” Daleep Singh, the chief global economist at PGIM Fixed Income and President Joe Biden’s former deputy national security adviser for international economics, told MM on Monday.

Treasury is expected to give Congress an update later this week on how much runway is actually available for lawmakers and the White House to avoid default. The clock is ticking on Speaker Kevin McCarthy’s bid to rally House Republicans behind a debt limit bill before the chamber breaks for a week-long recess.

So, with market-moving debt limit events on the calendar, where else should policymakers be looking for signs of woe on Wall Street?

“If the sequence holds, you begin to see more dislocation in repo markets and then credit markets more generally,” Singh said. “Then finally, equity markets and the dollar. But the broader asset classes — like equities — tend to react right at the last minute.”

For now, that hasn’t happened. Most of the activity we’ve seen around the debt limit fracas has been confined to quirky corners of the bond market. And while there are signs that top financiers have become alarmed, the stock market isn’t reacting as if there’s any acute pain ahead.

“Market pain is necessary to give politicians cover for a face-saving compromise to raise the debt ceiling,” he said. “Right now, I don't see a forcing mechanism for Congress. And that worries me because the drama can end differently than before if this continues.”

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Driving the Day

FHFA home price index will be released at 9 a.m. … The SEC holds a small business forum at 1 p.m.

ALL GAS, NO BREAKS — Our Olivia Beavers, Meredith Lee Hill and Sarah Ferris: “House GOP leaders are waving off calls from rank-and-file Republicans for changes to their debt-limit proposal. Instead, they’re plowing ahead toward a floor vote this week, daring detractors to vote against it.”

New Zandi just dropped — Biden officials are circulating a new report from Mark Zandi of Moody’s — whose work is often cited by the White House — that says McCarthy’s bill would eliminate 780,000 jobs from the economy and “cut into near-term economic growth if passed into law.”

First in MM: House Republicans press SBA on fintech lending — Zach reports that top Republicans on the House Small Business Committee are demanding that the SBA explain how it plans to police fintech firms that the agency will soon let participate in its flagship “7(a)” lending program as it also moves to loosen lending rules.

Chair Roger Williams led a letter to SBA with Reps. Blaine Luetkemeyer, Beth Van Duyne and Dan Meuser warning that they are “gravely concerned that the SBA is unable to handle this expanded responsibility” in light of fraud that occurred in its Covid-19 lending programs. The committee plans to hold two hearings on the changes next month.

Wall Street

We will not be taking questions at this time — From Sam: “First Republic Bank lost more than $100 billion of deposits before big banks orchestrated a rescue package amid the turmoil sparked by Silicon Valley Bank’s failure last month.”

“As the industry events unfolded in March, we experienced unprecedented deposit outflows,” CEO Mike Roffler told analysts during a 12-minute call Monday afternoon. “Beginning the week of March 27, our deposits stabilized and they have remained stable since that time as of March 31."

— The WSJ’s Rachel Louise Ensign: “First Republic shares have lost nearly 90% of their value since early March. They fell 20% in after-hours trading following the earnings report.”

“Not us,” say other banks — The NYT’s Jason Karaian and Stacy Cowley: “In recent calls with investors, regional bank leaders tried to cast the turmoil in the industry spurred by the collapse of Silicon Valley Bank as a moment that had passed.”

— Speaking of bank runs, a new slate of startups is raising beaucoup bucks from venture capital firms with claims that their AI tech can “keep lies from triggering the next bank run,” writes Bloomberg’s Margi Murphy.

Songs of Solomon — The NYT’s Emily Flitter has a story on Goldman Sachs CEO David Solomon’s work with Discovery Land Company, a luxury property company that specializes in “something akin to summer camp for the rich and famous.” Solomon is “also a part owner of the private company and for years has informally advised its founder — even as Goldman Sachs vied for work with Discovery.”

Wall Street’s bets — “Hedge funds are betting on higher Treasury yields in a market that’s divided over whether the US economy can avoid recession and Federal Reserve interest-rate cuts … ‘Hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting,’ said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. ‘On the face of it, this big short doesn’t reflect the view that there will be a near-term recession.’”

Harder to save in the Sun Belt — Texas is losing its edge in affordable housing after its population surged during the pandemic, according to Dallas Fed researchers.

The trouble in CRE — The WSJ’s Konrad Putzier: “It is unknown how bad the commercial property downturn will get … But the deeper problems facing office and certain retail landlords mean building values are less likely to rebound to new highs the way they did after those previous meltdowns.”

Crypto

COINBASE — Our Declan Harty: “Coinbase, the largest U.S. cryptocurrency exchange, sued the SEC on Monday in a bid to get the Wall Street regulator to formally say whether it will promulgate rules for the $1 trillion market. In a 31-page complaint, Coinbase — potentially the subject of looming SEC charges — asked a federal court to force the agency to say whether it will take up a nine-month-old petition for new rules tailored to digital assets that are akin to stocks and bonds.”

The GOP’s slimmed down stablecoin bill drops — From Sam and Eleanor Mueller: “House Financial Services Chair Patrick McHenry on Monday revealed a new GOP-led proposal for regulating stablecoins, with a discussion draft that would give state officials more leeway than an earlier bipartisan plan.”

— What are its prospects?: Remember, Treasury Secretary Janet Yellen raised concerns last summer over how a previous, bipartisan stablecoin addressed digital assets held in custody on behalf of consumers. And as Rep.French Hill (R-Ark.) told Eleanor last week: “The custodial features [and] those kinds of things might be better in a market structure bill, which we're also writing right now.” House Financial Services will hold a hearing on that bill — which hasn’t been introduced — at 2 p.m. on Thursday.

Jobs Report

Sezaneh Seymour is joining active cyber insurance company Coalition in May as VP and head of regulatory risk and policy. She most recently was a deputy assistant U.S. trade representative and is a former senior adviser to deputy national security adviser for cyber and emerging tech Anne Neuberger. – Daniel Lippman

Bernadette Carrillo is joining Tusk Strategies as a managing director. She most recently was director of intergovernmental affairs in the office of the secretary at the Commerce Department and is also a Biden White House alum. — Daniel Lippman

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