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As Debt Ceiling Lifts, Flood of T-Bills Set to Jack Up Rates

Get ready for the deluge of Treasury bills, and the increase in short-term funding costs that’s likely to accompany it.

Investors are bracing for an onslaught of T-bill supply following last week’s U.S. debt ceiling suspension. That’s already prompting them to demand higher rates from borrowers across money markets. And that’s just a result of the government replenishing its cash hoard to normal levels.

The ballooning budget deficit means there’s even more to come later, and that deluge of supply could further buoy funding costs down the line, making life more expensive both for the government and companies that borrow in the short-term market.

Concerns about the U.S. borrowing cap had forced the Treasury to trim the total amount of bills it had outstanding, but that’s no longer a problem and the government is now busy ramping up issuance. Financing estimates from January show that the Treasury expects to issue $441 billion in net marketable debt in the current quarter and the bulk of that is likely to be in the short-term market.

 

 

“Supply will come in waves and we’re in a very heavy wave right now,” said Mark Cabana, head of short-term interest rates strategy at Bank of America Corp. “If you take Treasury at their word that they want to issue $300 billion in bills, that’s a lot of net supply that needs to come to market.”

Next week’s three- and six-month bill auctions will be the largest on record at
$51 billion and $45 billion respectively, Treasury said Thursday. The four-week auction will be boosted to $55 billion next week, having already been lifted to $50 billion for the Feb. 13 sale. Auction volume at the tenor had earlier been shrunk to just $15 billion.

The government’s cash pile will, of course, receive a sugar hit when annual tax receipts start really flowing through to the coffers in April, and that may allow a temporary slowdown in issuance — and a reprieve in rates. But bill sale volumes are likely to surge again in the second half of 2018 as tax changes and increased government spending swell the fiscal deficit, and the Fed continues shrinking its balance sheet.

The anticipated supply boost is already causing T-bill yields to rise relative to overnight index swaps as investors seek more compensation to hold the securities.

Rates on repurchase agreements and other short-end secured instruments should also start rising as more paper hits the market, and unsecured lending instruments such as commercial paper and certificates of deposit are likely to be affected too. The prospect of further increases in bill supply has started to drive up forward expectations for the London interbank offered rate, the benchmark underpinning these markets, relative to the U.S. central bank’s target. The so-called FRA/OIS spread this week blew out to a level unseen in about 12 months.

Borrowers may try be trying to get ahead of the supply deluge, “believing things are going to move cheaper and if they act now they may need to do less when rates start to move higher,” Bank of America’s Cabana said.

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Companies buying back stock at record pace

Since President Donald Trump signed the tax bill, companies have announced about $170.8 billion in stock buybacks, the most ever for this early in the year.

“There’s a whole stock pile of cash that just came back. Take Cisco. We know they had $68 billion trapped overseas, and they’re going to take $25 billion of that and buy back stock,” said Art Hogan, chief market strategist at B. Riley FBR.

Birinyi Associates, which has tracked buybacks since the 1980s, said this year’s level, from Jan. 1 through Feb. 15, is the most ever, topping $147.2 billion in the period of 2016, which had been the busiest at this point of the year. During that period of 2016, the market was working its way out of a roughly 14 percent correction.

“It acts as a floor, you have a natural buyer in there,” said Jeff Rubin, director of research at Birinyi. Rubin said companies have been large buyers for a number of years now, and they have a large amount of cash already available for purchases.

“At the end of the third quarter, companies had dry powder of over $800 billion,” he said. Fourth quarter actual purchases are not yet available.

Rubin said this year became the largest with the latest rush of buybacks in the last two days, including Cisco and AMAT with $6 billion.

The tax bill cut the corporate tax rate, from 35 percent to 21 percent, and took aim at rules that had made it preferable for companies to stash foreign earnings overseas rather than spend them at home.

Democratic lawmakers who have been critical of the GOP bill have claimed it would be used for such things as share buybacks to enrich shareholders, rather than for capital expenditures or improving worker pay.

Second to Cisco is Wells Fargo, which was buying $22.6 billion shares. Others include Pepsi at $15 billion. Other companies announcing buybacks this year include Amgen, with $10 billion; Alphabet, $8.6 billion; Visa, $7.5 billion, eBay, $6 billion; Mondelez, $6 billion; Lowe’s Cos, $5 billion; Valero, $2.5 billion, and Eastman Chemical, at $2 billion.

Hogan said the buyback news should be good for the market.

“If they’re going to use it judiciously I think it’s going to be great. You’re either going to be paying a dividend, buying shares, or you’ll find something accretive like an acquisition or investing in your business,” said Hogan. “When CEOs are asked about it, it’s all of the above and buybacks are in there.”

“It helps drive earnings even higher than what our earnings estimates already are for 2018,” said Hogan.

Corporate buyback announcements through Feb. 15

2018 YTD $170.8 billion

2017 YTD $75.7 billion

2016 YTD $147.2 billion

2015 YTD $99.9 billion

2014 YTD $91.8 billion

2013 YTD $97.7 billion

2012 YTD $47 billion

2011 YTD $87.9 billion

2010 YTD $43.4 billion

2009 YTD $5.0 billion

2008 YTD $72.0 billion

2007 YTD $105.2 billion

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NEWS: Standard Lithium Announces Closing of $21.6 million Bought Deal Private Placement of Units

Standard Lithium Ltd. (“Standard Lithium” or the “Company”) (TSX-V:SLL) (OTCQX:STLHF) (FRA:S5L) announced today that it has closed its previously announced bought deal private placement of 10,312,821 units of the Company (the “Units”), at a price of $2.10 per Unit, for aggregate gross proceeds to the Company of $21,656,924, including the issuance and sale of the Underwriters’ (as defined below) option (the “Offering”).  Each Unit consists of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a “Warrant”).  Each Warrant is exercisable to acquire one common share of the Company (a “Warrant Share”) until February 16, 2020 at an exercise price of $2.60 per Warrant Share, subject to adjustment in certain events.  Net proceeds from the Offering will be used for exploration and development activities on the Company’s properties and for general corporate purposes.

The Offering was conducted by a syndicate of underwriters led by Canaccord Genuity Corp., as sole bookrunner and lead underwriter, and including GMP Securities L.P. (the “Underwriters”).  In connection with completion of the Offering, the Underwriters received a cash commission of 7.0% and options to acquire a number of Units equal to 7.0% of the Units issued in the Offering until February 16, 2020 at an exercise price of $2.10.  The Company paid a further cash commission of 3.0% and issued common shares equal to 3.0% of the Units issued in the Offering to a third-party who assisted in facilitating the Offering.

All securities issued or issuable under the Offering are subject to a statutory hold period lasting four months and one day following the closing of the Offering.

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Germans are getting over their cash addiction

german cash

Germans are falling out of love with cash.

Less than half of the money spent in Germany last year was cash, according to a survey conducted by the Bundesbank.

The central bank said it’s the first time that cash has not made up a majority of money spent. Cash transactions now account for 48% of money spent, down five percentage points from 2014.

Germans have not switched to credit and debit cards as quickly as people in other developed economies, preferring instead to use banknotes and coins for their purchases.

The average German wallet contains €107 ($132) in cash, according to the Bundesbank. That’s one of the highest amounts in Europe, and far more than the roughly €30 ($37) typically found in French and Belgian wallets.

Germans told the central bank that there were a few reasons why cash had remained popular for so long.

Many said it’s a more private way to pay, and they believe it’s faster.

More than three quarters of Germans said they were worried that some people wouldn’t be able to cope in a cashless society.

Seventy-one percent said cash was a good way to teach children about money, and 64% said using cash gives them greater control over their expenses. Credit cards are much less popular than debit cards.

The preferences shift, however, depending on how much money is being spent.

Germans still use cash in 74% of individual transactions, with that share rising to 96% when €5 ($6.20) or less is being spent. Only when it comes to paying €50 ($62) or more do Germans prefer card or electronic payments.

Americans use cash for 32% of individual transactions, according to the Federal Reserve Bank of San Francisco. The figure stands at around 50% in Finland, the Netherlands and Estonia.

Some observers argue that cash will remain in demand around the world.

San Francisco Fed President John Williams wrote in November that cash is convenient, and it doesn’t require a bank account or a mobile phone. In emergencies, it’s good to have stashed under the mattress.

A quarter of Europeans keep cash at home as a precautionary reserve, according to the European Central Bank.

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Inflation: More Evidence Is Showing That Prices Are Rising in the U.S.

Three measures of price pressures for American businesses showed they’re facing higher production costs, adding to evidence that inflation is creeping up in the U.S. economy.

The Empire State Manufacturing prices-paid index increased 12.4 points to 48.6 in February, the highest level since 2012, according to the survey published Thursday by the Federal Reserve Bank of New York. A separate index from the Philadelphia Fed showed prices paid in that region also surging in February, reaching the highest since May 2011.

The latest figures follow consumer-inflation numbers that helped send yields on 10-year Treasuries to a four-year high this week, after wage data roiled markets earlier this month on concerns that the Federal Reserve will raise borrowing costs more aggressively.

“Input price increases picked up noticeably,” according to the New York Fed report. “The index for future prices paid stayed close to last month’s multi-year high.”

  

In Washington, the Labor Department said in a report that U.S. wholesale prices rose in January on costs of energy and hospital services. The producer-price index increased 0.4 percent from the prior month, matching the median estimate in a Bloomberg survey of economists, after no change the prior month, the report said.

The PPI excluding food, energy, and trade services, a measure some economists prefer because it strips out the most volatile components, rose 2.5 percent in January from a year earlier — the fastest in data back to August 2014 — following a 2.3 percent gain.

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