Tag: US Treasury

Bitcoin edges off all-time high

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Bitcoin fell slightly in Asian hours on Thursday, a day after marking an all-time high on optimism around the launch of the first US bitcoin futures ETF.

The world’s largest cryptocurrency was last down 1.3 per cent at $65,184 after hitting a record $67,016 on Wednesday, but still above a previous peak of $64,895 seen in April.

Also see: Crypto users see the light at the end of the tunnel

“We think its going to go higher and we can get to 80,000 or 90,000 by the end of this year easy, but that won’t be without volatility,” said Matt Dibb, COO of Singapore-based Stack Funds.

Risk of overextension

In the past few days, Dibb said, traders were starting to pay high rates to borrow to buy bitcoin futures, “and that’s a sign that we could be a bit overextended, and there could be a pullback to come.”

He added he anticipated traders would rotate out of bitcoin and into major ‘altcoins’ — other cryptocurrencies.

Ether, the world’s second largest cryptocurrency, rose 1 per cent to $4,203 and there were also sharper gains in smaller tokens.

Market players say the latest wave of buying has been supported by the launch of the first US bitcoin futures-based exchange traded fund (ETF) with investors betting this will open a path to greater investment from both retail and institutional investors.

Sharp inflows

Existing bitcoin exchange-traded funds and products have seen sharp inflows since September.

Also see: Millennials pull crypto out of the shadows

Average weekly flows to bitcoin funds totalled $121.1 million in October, up from $31.2 million a month earlier, data from London-based CryptoCompare shows.

The three months prior to September had seen outflows following steep losses for bitcoin in May and June.

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Bitcoin investing could get boost from exchange-traded fund

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ProShares said Monday it plans to launch the country’s first exchange-traded fund linked to Bitcoin. The ETF with the ticker symbol “BITO” is expected to begin trading Tuesday, barring any opposition from regulators.

In a statement, ProShares CEO Michael Sapir compared the launch of a crypto-linked ETF to the 1993 launch of the first stocks ETF and the 2002 roll-out of the initial bond ETF. The US market for ETFs has grown to more than $5.4 trillion and they’re owned by roughly 9 per cent of all the nation’s households, according to the Investment Company Institute.

Cryptocurrencies, meanwhile, have exploded into a nearly $2.5 trillion industry after the creation of thousands of digital currencies. Bitcoin is the biggest of them all, with a total value of nearly $1.2 trillion. But like much in the crypto world, the Bitcoin-linked ETF is complicated.

The fund won’t invest directly in Bitcoin itself. Instead, it will focus on futures related to Bitcoin, a market that’s overseen by US regulators. Investors need to be particularly aware of what they’re buying and how it’s likely to perform.

Why is this a big deal?

A Bitcoin-related ETF would give investors a new way to get involved in the fast-growing field of cryptocurrency. Bitcoin’s price has more than doubled this year, and a growing number of investors see it as a way to offer their portfolios some protection.

Also see: Bitcoin hovers near 6-month high on ETF hopes, inflation worries

The hope is that Bitcoin’s price will move in a way that’s not as tied to expectations for the economy as stocks and other investments are. If it does, it could help support portfolios when everything else is falling or when inflation is high. But it doesn’t have a perfect track record. When the US stock market fell nearly 34 per cent at the start of the pandemic in 2020, Bitcoin lost roughly as much.

Some investors may not want to open a new trading account for cryptocurrencies. Instead, they can buy the ETF through old-school brokerage accounts they may already be using for their stocks or their IRA.

What is an ETF?

An exchange-traded fund allows investors to easily buy a whole basket of investments. Some of the most popular ETFs track things like the S&P 500 index of big US stocks, the price of gold or high-yield bond indexes.

Unlike with a traditional mutual fund, which prices just once a day, investors can buy or sell an ETF throughout the trading day. That’s particularly important for cryptocurrencies, whose prices can swing sharply from minute to minute, let alone day to day.

So this new ETF will track the price of bitcoin?

No, and this is one of the most important distinctions. The fund will invest in Bitcoin futures, which are essentially bets on where Bitcoin’s price will go in each of the months ahead.

The Bitcoin futures market is overseen by the Commodity Futures Trading Commission, which may offer investors more protection. But it also doesn’t perfectly track the price of Bitcoin.

“This is not a replacement for owning bitcoin directly,” said Todd Rosenbluth, Head of ETF and Mutual Fund Research at CFRA.

Who is this best suited for?

Because it will be invested in futures instead of actual Bitcoins, the ETF is less than ideal for a Bitcoin believer who wants to invest in it for the long term, Rosenbluth said.

Instead of a buy-and-hold investor, he said it’s more likely to be popular with shorter-term traders who want to make money off its volatility, at least initially. There’s certainly plenty of opportunity for that.

In the span of roughly three months earlier this year, Bitcoin more than halved from nearly $64,900 to less than $30,000. Since that low point in July, it’s surged back to nearly $61,800.

How much will it cost?

BITO will have an expense ratio of 0.95 per cent. That means $95 of every $10,000 invested in the fund will go toward paying its annual operating expenses.

Such fees could be a hard sell for Bitcoin fans, many of whom see cryptocurrencies as a way to erase middlemen from industries.

Is this the first and last such ETF?

No, several other fund companies have their own applications for ETFs linked to Bitcoin futures. Some may try to separate themselves by charging lower fees.

Also see: Millennials pull crypto out of the shadows

Beyond just extending the reach of Bitcoin, the ETFs will help create a bigger ecosystem in the financial world around it, said Ben Johnson, Director of Global ETF Research at Morningstar.

With a Bitcoin-linked ETF, sceptical investors will have something that they can sell short. In such a trade, they can bet on the ETF’s price to fall by borrowing a share and selling it, hoping to buy it back later at a lower price. The ETFs could also allow for trading of options around them.

“The money made on all that trading activity is going to dwarf the money made just on collecting fees for those products,” Johnson said.

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Treasury storm may impact India, Indonesia bonds less than others

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Bonds from the two countries are already leading gains in emerging Asia this quarter, offering 3 per cent-5 per cent returns to dollar-based investors. In comparison, lower-yielding bonds from Thailand and South Korea have handed losses of between 4.5-5 per cent.

The Treasury rout spurred by the Federal Reserve’s indication that it may start tapering bond purchases in November has intensified amid challenges faced by President Joe Biden’s administration in raising the debt ceiling. The wave of global bond sell-off that ensued has weighed on Asian bonds, with hawkish comments from UK and Norway’s central bank adding to jitters.

Indonesia and India’s bonds have outperformed due to their wider spread over Treasuries, softer inflation prints relative to emerging-market peers, positive fiscal developments and the central bank’s bond purchases, said Siddharth Mathur, head of emerging-market research for Asia Pacific at BNP Paribas SA. “We expect these trends to remain intact into the end of the year.”

The 10-year bonds from the two nations have a buffer of around 470 basis points each over similar-maturity Treasuries. Despite the recent moves, the gap is near a five-year average for rupee bonds while it has tightened from a mean of 515 basis points for rupiah debt. The premium offered by won and baht bonds is around 70 basis points or lower on similar notes, making them more vulnerable to Treasury swings.

Indonesia pledged to return the budget shortfall to below 3 per cent of gross domestic product by 2023, while India this week stuck to its borrowing plan for the second half of the fiscal year ending in March 2022. A potential inclusion in global bond indexes is seen as another positive catalyst for Indian bonds.

Foreign funds poured $3.3 billion into Indian bonds in the three months ending September, the most since the third quarter of 2017. Rupiah bonds saw a net outflow over the same period but robust onshore demand, following a reduction in debt supply, and Bank Indonesia’s purchases have kept yields anchored.

Risks ahead

Rupee bonds face the risk that the Reserve Bank of India may tighten its policy soon. The central bank drained cash from the banking system at a sharply higher rate Tuesday after making its bond purchase program liquidity-neutral since last week.

Macro risk from a hawkish Fed still persists for rupiah debt given that nearly 22 per cent of the nation’s sovereign bonds are held by foreign investors. While that proportion has fallen from as much as 39 per cent in January 2020, it’s still one of the highest among Asian nations.

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G-secs react to the beginning of Fed taper

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Three things happened last week that made happy bond traders trim their long positions, at least, to a certain extent ahead of the second half borrowing calendar set to be released this week.

US treasury yields shot up after the Federal Reserve stated it could cut back on its bond purchases beginning November and conclude the process by the middle of 2022. The 10-year treasury yield climbed to 1.45 per cent on Friday from 1.37 per cent, the week before. The proximity of the taper process and the expectation of US Fed Funds rate to be increased by the end of 2022, brought forth risk-off trades in bond markets. The G-sec yields too rose from 6.14 to 6.19 per cent after the FOMC meeting. As one bond trader described, “When the US sneezes, the rest of the world catches a cold.”

And as if that wasn’t enough, crude prices continued to rise for the third straight week and hit close to three-year highs over global output disruptions, tightening inventories and persisting demand.

Key events back home

Higher crude prices tend to negatively impact bond prices due to the impact they have on fuel inflation and monetary policy decisions. On the domestic front, the Reserve Bank of India did come out with the much awaited G-SAP auction. The Central bank announced a simultaneous purchase and sale of securities which means the net liquidity injection into the market was nil. The Central bank conducted purchases of long tenor bonds maturing in 2028, 2031, and 2035, cumulatively amounting to ₹15,000 crore while selling short-tenor bonds maturing in 2022, also amounting to ₹15,000 crore. Next week too, the RBI will be conducting a similar operation of simultaneous purchase and sale of long and short tenor bonds, respectively. Bond market participants say that although it was a minor dampener, they have come to terms with the fact that the RBI may not be too comfortable with the high amount of liquidity prevailing in the market.

The benchmark yield hit 6.19 per cent last week having risen from the lows of 6.12 per cent seen the week before.

Going forward, the second half borrowing calendar and the monetary policy outcome in early October will be key events. In case the second half borrowing figure comes below ₹5-lakh crore, the benchmark yield could retest the 6.1 per cent level. However, if the borrowing figure is higher than ₹5.5-lakh crore, the 10-year yield could breach the 6.23 per cent level, traders say.

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Shaktikanta Das, BFSI News, ET BFSI

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The Reserve Bank of India‘s (RBI) role as a full-service central bank – North Block’s debt manager, banking regulator, and monetary policy conductor – helped keep the financial markets stable during volatile times, said Governor Shaktikanta Das, blunting the debate to spin off government borrowing from the central bank.

“In the wake of the pandemic, when fiscal response resulted in a sharp increase in government borrowing, the market operations conducted by Reserve Bank not only ensured non-disruptive implementation of the borrowing programme, but also facilitated the stable and orderly evolution of the yield curve,” Das said. “Monetary policy, G-sec market regulation and public debt management, therefore, need to be conducted in close coordination, and the primary focus of such coordination is the G- sec market.”

The RBI’s role as the investment banker to the government and banking regulator came in handy when the state had to respond to extreme stress in the economy – unlike the US where balkanisation of regulations disrupted the market, he said.

“The Reserve Bank’s regulation of the G-sec market has also a strong synergy with its role as the banking regulator – as banks are the largest category of participants in these markets,’’ said Das. “The importance of this aspect is also highlighted in the recent G30 report, which identified the balkanized regulation of US Treasury markets where banking regulations seem to have adversely impacted market-making.’’

Governor Das said direct oversight of various markets and the obligations to keep the markets stable and expand the economy have synergies.

“The synergy between the Reserve Bank’s responsibility for key macro market variables – interest rates and exchange rates, which ensures overall financial market efficiency – and its obligation to ensure stability while keeping in mind the objective of growth is well-accepted,’’ Das said. “Indeed, its effectiveness in managing stress in foreign exchange and interest rate markets is made possible by direct access and oversight of the G-sec market.’’

Insurance and pension funds, among the largest holders of government bonds, should take the next step to be active in the securities lending market so that market liquidity is not concentrated and that during times of volatility, the yield curve moves in an orderly way, he said. Das said that discussions held by the Securities Lending and Borrowing Mechanism (SLBM) on augmenting secondary market liquidity, by incentivizing investors like insurance companies and pension funds, should be carried forward.

The RBI is also making efforts to enable international settlement of transactions in G-secs through International Central Securities Depositories (ICSDs), he said.

“Once operationalized, this will enhance access of non-residents to the G-secs market, as will the inclusion of Indian G-secs in global bond indices, for which efforts are ongoing,” Das said.

Separately, Das also said that the global economy is showing some signs of recovery but the problems aren’t over yet.

“While there are signs of recovery, we are not yet out of the woods,” he said “Many central banks also implemented measures targeting specific market segments that were witnessing heightened stress. These measures were, in many cases, complemented by regulatory relaxations (lower capital and liquidity requirement) aimed at supporting credit flow from banks and other financial intermediaries and at stabilizing the financial system and restoring confidence in financial markets,” Das said.



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US dollar rises as caution reigns ahead of key central bank meetings, BFSI News, ET BFSI

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NEW YORK: The dollar gained for a third straight session on Monday, as traders cut their bearish bets on the greenback to four-month lows amid the recent rise in US Treasury yields and grew cautious ahead of key global central bank meetings.

The Federal Reserve, Bank of England, and Bank of Japan are all set to meet this week and will likely set the tone as to where global rates are headed.

US Treasury yields, however, were lower on Monday in line with Europe, ahead of these central bank gatherings. Benchmark 10-year Treasury yields traded as high at 1.639% on Monday, close to Friday’s top of 1.6420%, a level last seen in February 2020.

Gains in the greenback were more pronounced against low-yielding currencies such as the euro and the British pound while high-yielding currencies like the Australian dollar fared relatively better.

“The US dollar has been one of the best-performing G10 currencies in recent weeks reflecting a shift in expectations regarding Fed interest rate policy,” said Jane Foley, senior FX strategist, at Rabobank in a research note.

“Since the reflation trade is centered around US fiscal policy and growth expectations, the US dollar could prove to be more resilient than the consensus had been expecting at the start of the year.”

Rising US yields have lifted the greenback 2% so far this year thanks to widening interest rate differentials relative to other major bond markets. The dollar declined more than 4% in the last quarter of 2020.

In mid-morning trading, the dollar index, which tracks the US currency against six major peers, was up 0.2% at 91.68 . It hit a late November 2020 high of 92.51 last week.

The US currency has been supported by declining bets for its decline, with speculators cutting net short positions to the lowest since mid-November in the week ended March 9.

Rising bond yields will continue to focus minds this week before a Fed meeting at which some analysts expect policymakers to strike an optimistic tone on the US economy.

While there are some expectations that the Fed might try to calm bond markets – yields have risen some 60 basis points since the last Fed meeting – the consensus view is Fed Chief Jerome Powell will not make changes to policy.

“The Fed is not expected to tinker with its monetary policy but instead communicate via forecasts that the situation is under control and that markets are running way ahead of themselves,” SEB analysts said in a note.

The greenback rose 0.2% against the yen to 109.19, after earlier climbing to 109.36 yen, the highest since June 2020.

The euro weakened 0.3% to $1.1920 after rising last week for the first time in three weeks as latest data showed hedge funds slashed their net euro positions.

The Australian dollar – viewed widely as a liquid proxy for risk appetite – fell 0.4% to US$0.7725, extending Friday’s Loss.

Bitcoin, meanwhile, weakened 3.3% after surging to a record high of $61,781.83 over the weekend.



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SBI raises $600 million at 1.80% coupon, BFSI News, ET BFSI

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Public lender, State Bank of India through its London branch raised $600 million of ‘Regulation S’ bonds at a coupon rate of 1.80%.

The bond has been benchmarked against the 5 year US treasury and priced at a spread of 140 bps over the benchmark. The bonds will be listed on SGX-ST and India INX.

SBI said, “The transaction was well received and saw strong interest from investors across geographies with a final order book in excess of USD 1.9 billion. On the back of strong demand, the price guidance was revised from T+175 bps area to T+140 bps, with a peak orderbook of USD 2.1 billion resulting in final pricing at the tight end of the range i.e. T+140 bps. The Notes are expected to carry a final rating of Baa3, BBB- and BBB- from Moody’s, Standard and Poor’s and Fitch respectively.”

Commenting on the successful transaction, C Venkat Nageswar, DMD – International Banking Group, said, “The successful issuance demonstrates the strong investor base SBI has created for itself in offshore capital markets allowing it to efficiently raise funds from the World’s leading fixed income investors, even during periods of heightened volatility. This is an indication of confidence global investors have in the Indian banking sector generally, and in SBI in particular and is also testament to the exceptional access that SBI enjoys in the global capital markets.”

BofA Securities, Citigroup, HSBC, J.P. Morgan, MUFG, SBICAP and Standard Chartered Bank were the Joint Bookrunners for this offering.



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