David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Britain Comes to Terms With Its New Water Poor Reality

    This article from Bloomberg may be of interest. Here is a section: 

    By 2050, the UK’s Environment Agency expects the gap between available water and what’s needed by homes and businesses to reach 4 billion liters per day in England — enough to fill 1,600 Olympic size swimming pools. Leaks are part of the picture, but so is a neglected network, some of which was built more than 150 years ago, that doesn’t store enough for times of drought, and water consumption that outstrips many other parts of Europe.

    The crisis has become a national obsession. The public is furious with a privatized English water industry that has paid out millions to executives and shareholders while failing to keep pace with population growth and climate pressures, and the government and regulators that have allowed it to happen. As well as the threat of water shortages, underdeveloped pipes and treatment plants mean raw sewage is frequently dumped in rivers and the sea, causing environmental damage.

    Now, after years of delays, the UK is racing to fix its broken water system before it’s too late. “The worst risk has not materialized yet,” says Jim Hall, a professor of climate and environmental risk at Oxford University and a member of the government’s official infrastructure adviser. “There is some sense until now that we’ve got away with it,” he says, but “a severe and prolonged drought could materialize at any time.”

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    Treasuries Gain as Investors Assess Debt-Ceiling Accord Impact

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    Mounting rate-hike expectations have pushed short-term yields up relative to longer-term ones, flattening the Treasury curve. The flattening continued Tuesday as yields declined, briefly pushing 30-year yields below the five-year for the first time since March.

    The trend has temporary support from Wednesday’s month-end bond index rebalancing, which may create demand for the long-maturity Treasuries created during the month in quarterly auctions. 

    Later this week, Friday’s release of US labor market data for May has the potential to alter expectations for Fed policy. Job creation exceeded economists’ median estimate in April and each of the previous 12 months. However Fed officials in their public comments have been divided on how to balance an anti-inflationary stance with the possibility that the central bank’s 10 rate increases totaling 5 percentage points in the past 14 months warrant a pause in June.

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    Soaring Real Yields Suggest Fed's Inflation Battle Isn't Over

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    But the latest swing higher in real yields shows that in spite of fraught debt-ceiling negotiations, the world’s biggest bond market senses another jolt of policy tightening and an extended period of staying on hold may be warranted. A similar outlook is being echoed in the swaps market, with traders almost fully pricing in a quarter-point hike within the next two policy meetings.

    That view has found support in recent data pointing to a resilient US economy and sticky inflation. A report on Friday showed the inflation rate for US personal spending on items excluding food and energy running firmer than forecast at an annual pace of 4.7% in April. That comes amid upside surprises in UK and European inflation numbers, reminders that central banks may have more work to do and bond yields may keep climbing. 
     

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    Debt-Ceiling Fears Drive Early June T-Bill Yields Above 7%

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    Treasury-bill yields slated to mature early next month surged, driving them above 7% amid building concern that talks in Washington will fail to resolve the debt-ceiling crisis and the US might default.

    The rate on the June 1 and June 6 maturities soared more than a percentage point on the day, while others for early June also climbed sharply. By comparison, the earliest June tenors yield around 4 percentage points above the May 30 issue. 

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    African Central Banks Poised to Hold Rates as Inflation Softens

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    A temporary slowdown in inflation may give Egypt’s MPC room to pause, especially after Governor Hassan Abdalla signaled higher interest rates are doing little to cool prices.

    The central bank “is likely to remain data-led, and will see declining global commodity prices and a reduction in domestic inflation as supportive of their current monetary stance,” said Farouk Soussa, an economist at Goldman Sachs Group Inc. The monetary authority sees inflationary pressures stoked mainly by supply issues, “reducing the rationale for a further hike in the medium term,” he said.

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    Biden 'Confident' on Reaching Debt Deal as GOP Bashes Japan Trip

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    President Joe Biden expressed confidence that negotiators would reach an agreement to avoid a catastrophic default, even as House Speaker Kevin McCarthy criticized his decision to travel to Japan for an international summit.

    “I’m confident that we’ll get the agreement on the budget and that America will not default,” Biden said Wednesday at the White House, shortly before departing to Hiroshima, Japan for a Group of Seven leaders summit.

    On Capitol Hill, McCarthy and other Republican lawmakers criticized Biden for his decision to travel, with the House speaker labeling the president “a big obstacle” to an agreement.

    “Mr. President, stop hiding, stop traveling,” McCarthy said.

    On Tuesday, Biden and congressional leaders agreed to a new narrower round of staff-level talks with hopes of reaching a bipartisan deal to avoid an unprecedented US default. The US president also announced he was canceling planned stops in Australia and Papua New Guinea, and would return to Washington by the beginning of next week for continued negotiations.

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    The Green Energy Transition Has a Chilean Copper Problem

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    Codelco’s production is down by about a fifth from only six years ago. After a double-digit-percentage drop in 2022, it’s expected to fall as much as 7% this year, to 1.35 million metric tons.

    Ore quality is deteriorating around the world as existing deposits are depleted and new ones are more difficult and costly to develop. “There’s no easy mining left—not in Chile nor the rest of the world,” said Sougarret at a shareholders meeting on May 2.

    Because Codelco is the world’s biggest copper supplier, its production wobbles have greater impact on a market where warehouse inventories are near their lowest levels in 18 years. The company’s travails also have tremendous impact on Chile’s economy: Copper accounts for more than half of the country’s exports and a significant share of the government’s income. President Gabriel Boric’s administration is budgeting a 40% drop in tax revenue from Codelco in 2023 at a time when it’s trying to boost social spending.

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    Dollar on Pace for Best Day in Nearly Two Months

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    The US dollar is on pace for its biggest rise in nearly two months as concerns about a slowing US economy, hawkish policy messaging, a US debt-ceiling standoff and the solvency of regional banks supported havens. The pound fell after the Bank of England lifted its policy rate 25 basis points and indicated more hikes may be required to slow inflation.

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    Brookfield Cuts Value of Property Holdings Amid Market Swoon

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    “Unfortunately, the negative sentiment is dragging down the real estate sector more broadly,” the firm’s president, Connor Teskey, told investors during an earnings call Wednesday. “We think that’s completely unfair.” 

    The Brookfield group is one of the world’s largest owners of prime office properties, with a portfolio that includes New York’s Manhattan West and London’s Canary Wharf. Office landlords in major cities around the world are being squeezed by a combination of higher borrowing costs and lower occupancy, as many companies continue to allow employees to work from home at least part of the time. 

    Brookfield Asset’s parent company has defaulted on mortgages covering more than a dozen office buildings, mostly in Los Angeles and around Washington.

    The property market is “bifurcated” as high-quality assets perform well and lower-quality assets struggle, Teskey said on the call. 

     

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    First Republic Plunges Anew Amid Elusive Search for Rescue Plan

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    US officials are coordinating talks to rescue First Republic, with the Federal Deposit Insurance Corp., the Treasury Department and Federal Reserve orchestrating meetings about throwing a lifeline, Reuters reported, citing unidentified people. 

    But some of the biggest US banks, which have already contributed $30 billion in deposits to prop up First Republic, have balked at getting more involved and potentially throwing good money after bad, Bloomberg News reported. 

    The focus has shifted to a US takeover, according to CNBC. For its part, First Republic has acknowledged it’s engaged in discussions with multiple parties about strategic options.

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