"EVERY BIT HELPS". RECORD PERFORMANCE OF US TREASURIES
Dear clients,
Foreign buying of US Treasury bonds in March rose to the highest level in more than two years, Treasury Department data showed on Monday, as investors bought government debt amid bank stress during the month.
US Treasuries rose to $7.573 trillion in March, up about $230 billion from $7.343 trillion the previous month. Monthly Treasury bond accumulation in March was the highest since June 2021, analysts at TD Securities said.
According to the cited data, March was particularly significant as it was a time of volatility in the banking sector. The most interesting point was the huge amount of treasury bond purchases. Investors were de-risking at the time because of banking stress. There was a lot of buying on the Chinese side, a lot of buying on the Japanese side. There were interesting purchases from the UK side or via the UK, indicating purchases by hedge funds.
The benchmark 10-year Treasury yield started March at 3.996%, falling by 50 basis points to 3.49% by the end of the month. In October last year the yield on 10-year US Treasuries reached a 15-month high of 4.338%.
Foreign inflows into Treasuries were $35.8bn per trade in March, up from $57.6bn in the previous month. US equities were also bought by foreigners, with inflows of $36.1bn following net sales of $16.2bn in February and outflows of $27.5bn in January.
US residents, meanwhile, increased their holdings of long-term foreign securities, with net purchases of $22.8bn compared with net sales of $8.3bn in February.
Overall, net purchases of long-term overseas securities totaled $133.3bn in March, up sharply from February's inflow of $56.6bn, the data showed.
PLATINUM DROUGHT
Dear clients,
Rising demand from automakers, industry and investors will push the global platinum market into the biggest deficit in years, three industry reports predict.
The reports highlight the changing fortunes of platinum and its cognate metal palladium, which are used mainly in vehicle exhausts to help neutralise harmful engine emissions. For many years, growing demand and shortages of palladium have pushed prices upwards, while low consumption and a more abundant supply of platinum have kept prices low.
Two reports released on Monday suggest that if palladium remains in short supply this year, the platinum supply shortfall will be greater. Automakers are switching from palladium to platinum as a cost-saving measure, heavy-duty vehicles with a high platinum content are on the rise, while zero-emission electric cars are making their way into the palladium-focused light vehicle market. Platinum is also being supported by industrial and jewellery consumption, while palladium demand is almost entirely dependent on the automobile sector.
The World Platinum Investment Council forecast a platinum deficit of 983,000 oz, the highest since the 1970s, following last year's surplus of 854,000 oz.
Meanwhile, net platinum holdings in the ETF increased by 43,000 ounces in Q1 '23, reversing six previous quarters of net disinvestment. The board believes that the revised 2023 deficit forecast of almost 1 million ounces based on historical data is likely to attract additional investor interest in bullion and coins as well as physical asset-backed ETFs.
FOR A RAINY DAY. HOW WALL STREET IS PREPARING FOR A POSSIBLE DEFAULT
Dear clients,
As negotiations to raise the debt ceiling of the USD 31.4 trillion government debt intensify, Wall Street banks and asset managers have started to prepare for the consequences of a possible default.
The financial industry has prepared for such a crisis before, most recently in September 2021. But this time, the relatively short timeframe for a compromise has bankers on their guard, said one senior industry official.
US government bonds underpin the global financial system, so it is difficult to fully assess the damage a default would cause, but executives expect strong volatility in equity, debt and other markets.
The ability to trade in and out of treasury bonds on the secondary market will be severely limited. Even a short-term breach of the debt ceiling could lead to a spike in interest rates, a plunge in equity prices and a breach of credit documentation and leverage agreements.
Banks, brokers and trading platforms are preparing for disruptions in the treasury market as well as wider volatility.
This typically includes planning for how payments in treasury securities will be made; how the critical funding markets will react; ensuring there is sufficient technology, staffing and cash to handle large trading volumes; and checking the potential impact on contracts with clients.
Large bond investors have warned that maintaining a high level of liquidity is important in order to withstand potential sharp fluctuations in asset prices and avoid having to sell at the most inopportune time.
The Securities Industry and Financial Markets Association (SIFMA), a leading industry group, developed an action plan that details what Treasury bond market participants — the Federal Reserve Bank of New York, the Fixed Income Clearing Corporation (FICC), clearing banks and Treasury bond dealers — should do in the run-up to and on the days of a possible Treasury bond payment miss.
SIFMA considered several scenarios. The most likely scenario is that the Treasury would buy time to pay bondholders by announcing on the eve of the payment that it would reschedule these securities, extending them one day at a time. This would allow the market to continue functioning, but no interest would likely accrue on the deferred payment.
In the most destructive scenario, the Treasury does not pay any principal or coupon and does not extend the maturity date. The outstanding bonds would no longer be tradable and could not be transferred through the Fedwire Securities Service, which is used to hold, transfer and settle Treasury bonds.
Each scenario is likely to cause significant operational problems and will require daily manual adjustments to trading and settlement processes.
In addition, in past periods of confrontation over the debt ceiling issue — in 2011 and 2013 — Fed staff and policymakers developed their plan, which is likely to serve as a starting point, with the last and most sensitive step being the complete removal of defaulted securities from the market.
Dear clients,
