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Apr-18-2008TREASURIES-Prices fall as investors slash US rate cut bets(topic overview)
CONTENTS:
- NEW YORK, April 18 (Reuters) - U.S. Treasury debt prices slipped on Friday, as bond investors pared back expectations for Federal Reserve interest rate cuts because of persistent inflation stoked by surging global food and energy prices. (More...)
- Even when food and energy are excluded, CPI prices in March are expected to have increased to 2.4 per cent from a year ago, which is well above the upper end of the U.S. Federal Reserve Board's comfort zone of 2 per cent. (More...)
- Treasuries fell Wednesday as a stock market rally grabbed the spotlight, reducing the safe-haven appeal of government debt and erasing early gains scored when weak housing data briefly boosted hopes for more Federal Reserve rate cuts. (More...)
- Tread carefully and heed the signs of credit, not stocks, for a true bear market bottom. (More...)
- A one-two punch of higher inflation at the producer level and stronger manufacturing data socked bonds, said Bank of Tokyo-Mitsubishi's chief financial economist, Chris Rupkey. (More...)
- Change in reverse repos = 3,475. 918,827 - 17,774 - 3,475 = 897,578. (More...)
- Which weights are the best? Basically 100% of the bond indices that are used out there are market weighted. (More...)
- If the authorities step in and "save" the banking system from bad credit, you can bet that if the central bank merely maintains the old credit level and doesn't expand credit, many prices are still going to rise from long neglect. (More...)
- Citigroup, the biggest U.S. bank by assets, reported a first-quarter net loss of $5.11 billion. (More...)
- The price of the 1 3/4 percent security due March 2010 fell 1/8, or $1.25 per $1,000 face amount, to 99 2/32. (More...)
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NEW YORK, April 18 (Reuters) - U.S. Treasury debt prices slipped on Friday, as bond investors pared back expectations for Federal Reserve interest rate cuts because of persistent inflation stoked by surging global food and energy prices. The two-year Treasury note's yield, which moves inversely to its price, rose above 2.20 percent, the highest in two months and within 5 basis points of the Federal Reserve's benchmark target rate, currently at 2.25 percent. [1] NEW YORK, April 18 (Reuters) - U.S. Treasury debt prices fell on Friday, as bond investors slashed expectations for Federal Reserve interest rate cuts, concluding that food and energy inflation may prevent the Fed from easing much further. The two-year Treasury note's yield, which moves inversely to its price, rose to nearly three-month highs.[2] NEW YORK, April 17 (Reuters) - U.S. Treasury debt prices fell on Thursday despite a dismal factory activity report amid signs that bond investors expect that the Federal Reserve may not cut interest rates much further. Yields, which move inversely to their prices, rose as market participants pared back expectations for rate cuts. Treasury prices earlier rose -- but only fleetingly -- on news that the Philadelphia Federal Reserve's business conditions index for April fell to its lowest reading since February 2001.[3]
NEW YORK, April 15 (Reuters) - U.S. Treasury debt prices fell on Tuesday after higher inflation in March and an improved regional manufacturing index persuaded investors that the Federal Reserve might not cut interest rates sharply this month.[4]
"The Fed seems to be caught in a balancing act between the problems in credit and the economy and the fear of inflation," said Joe Keetle, senior wealth manager at Dawson Wealth Management in Cleveland. "We have another rate cut coming up and I think they will go with a quarter percentage point. They are starting to run out of room," he said. Treasury prices fleetingly rose after the Philadelphia Federal Reserve's business conditions index for April fell to its lowest level since February 2001, adding to other recent signals the U.S. economy is deteriorating. U.S. short-term interest rate futures were showing the chance of a 25 basis-points rate cut at the policy meeting at the end of this month is fully priced in, with just a 24 percent chance of a deeper 50 basis points cut.[5] We have seen a big change in sentiment over the last couple of weeks," said Rupert, adding that resilient inflation pressures are causing the bond market to rethink just how low the Fed can cut the target rate. U.S. short term interest rate futures pared back bets for a deeper 50 basis points Federal Reserve cut at the end of this month to about 14 percent early Friday from about 18 percent late Thursday.[1] Major U.S. stock indices were up at least 1 percent. "The Fed is finished either here or at 2 percent for the time being" if the U.S. central bank cuts its target rate by 25 basis points at the end of April as many investors expect, he said. U.S. short term interest rate futures abandoned any implied chance of a deeper 50 basis points Federal Reserve cut at the end of this month, but the likelihood of a shallower 25 basis points rate cut on April 30 remained priced in.[2] CHICAGO, April 18 (Reuters) - U.S. short-term interest rate futures tumbled on Friday as equities rallied and dealers reconsidered expectations that the Federal Reserve will cut benchmark rates aggressively at its April meeting. The implied prospects for the Fed to cut the federal funds rate by 50 basis points fell to zero from 16 percent late on Thursday, and 50 percent early this week.[6] The fed funds rate is the benchmark inter-bank lending rate the Federal Reserve sets. U.S. short-term interest rate futures erased all expectations for a deeper 50 basis points rate cut at the end of this month and now show that only a shallower 25 basis points cut is seen as likely.[7]
"The market appreciates that we're in a recession now, but thinks that the Fed has already frontloaded a lot of the rate cuts that are needed to offset weaker growth," said Zach Pandl, economist at Lehman Brothers in New York. One sign of this is that U.S. interest rate futures now point to a Fed rate cut of 25 basis points at the Fed's next policy meeting on April 29-30, while the odds of a deeper 50-basis-point rate cut has been slashed to just 18 percent. The Fed has cut its benchmark U.S. overnight fed funds rate by three percentage points since September to 2.25 percent. The price of the two-year note, which moves inversely to its yield, fell 7/32.[3] The two-day climb of 17 basis points is the biggest since August. The drop in two-year notes "is related to the issue with Libor, and it's forcing down the short end of the curve,'' said said Theodore Ake, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York. "People are really worried about the implications of the Libor mess; unlike the previous times when they didn't know what to do and bought two-year notes, this time they're selling two-year notes and trying to get into cash.'' Futures on the Chicago Board of Trade show a 90 percent chance the Fed will cut its target rate to 2 percent this month, up from 54 percent a week ago. Traders also eliminated bets on a half-point cut and saw a 10 percent likelihood of no reduction this month, futures show. The U.S. central bank has slashed its benchmark rate by 3 percentage points since September to 2.25 percent to avert a recession and spur lending. Two-year notes led today's decline, pushing their yields to within about 159 basis points of those on 10-year notes, the smallest difference since Feb. 4.[8]
"The Fed seems to be caught in a balancing act between the problems in credit and the economy and the fear of inflation," said Joe Keetle, senior wealth manager at Dawson Wealth Management in Cleveland, Ohio. U.S. short-term interest rate futures were showing the chance of a 25 basis-points rate cut at the policy meeting at the end of this month is fully priced in, with just a 22 percent chance of a deeper 50 basis points cut.[9] Encouraging as their greater sense of realism might be, Treasury Secretary Paulson and Chairman Ben Bernanke are both now peddling the line that the policy measures taken to date will more than likely be sufficient to turn the U.S. economy around by the second half of the year. They seem to believe that the 300 basis point cut in the federal funds rate since last August, coupled with the recently enacted U.S. $168 billion fiscal stimulus package, will be sufficient to more than offset the contractionary impact of the ongoing housing and credit market crises as well as of the recent spike in international oil prices. It is certainly true that the reduction in the federal funds rate from 5' percent last August to 2' percent today has been the most aggressive such cut in decades.[10]
NEW YORK, April 17 (Reuters) - Longer-maturity Treasury debt prices rose on Thursday as an expected lower open for U.S. stocks stoked demand for safe-haven U.S. government debt. Short-maturity yields, which move inversely to their prices, rose as market participants pared back expectations for Federal Reserve interest rate cuts.[9] NEW YORK, April 16 (Reuters) - U.S. Treasury debt prices fell on Wednesday as a stock market rally grabbed the spotlight, reducing the safe-haven appeal of government debt and erasing early gains scored when weak housing data briefly boosted hopes for more Federal Reserve rate cuts.[11]
April 18 (Bloomberg) -- U.S. Treasuries fell, leaving two- year notes poised for their biggest weekly decline since 2001, as better-than-forecast revenue from Citigroup Inc. spurred gains in stocks and decreased demand for government debt. Traders stepped up bets the Federal Reserve will cut its benchmark interest rate by just a quarter-percentage point April 30 after central bank officials signaled this week they're hesitant to drop rates further.[8] TOKYO, April 16 (Reuters) - U.S. Treasuries edged up in Asia on Wednesday as investors awaited data on inflation, housing and industrial activity for clues on the magnitude of an expected interest rate cut by the Federal Reserve later in the month.[12] Treasuries fell Tuesday, with higher inflation in March and an improved regional manufacturing index convincing investors that the Federal Reserve might not cut interest rates sharply this month.[13]
TOKYO, April 18 (Reuters) - U.S. Treasuries rose modestly in Asia on Friday as some investors hunted bargains following a fall in the past week due to growing expectations that the Federal Reserve may not lower interest rates much further.[14]
As Lyle Gramley, a former Federal Reserve Governor correctly notes, over the same period, long-term government bond rates have not declined by nearly as much, while interest rate spreads on private sector borrowing have blown out. The net upshot of these market developments is that the economically relevant rates at which both households and corporations borrow today are no lower than they were in August 2007 when the present credit crisis began. To compound matters, over this period, there has been a marked tightening in credit market conditions as the troubled U.S. banking sector has been cutting back on risk, while a pronounced process of de-leveraging is in full train in the non-bank financial sector. It would also appear that the recently approved fiscal package will to a large degree be negated by very much higher international oil prices.[10] A dangerous myth is taking hold in Washington. It is the idea that the Federal Reserve's interest rate cuts, together with the recently approved fiscal stimulus package, will be sufficient to keep the U.S. recession short and mild. The gaining currency of this notion threatens to delay those additional policy measures so sorely needed to address the United States' most severe housing market and credit market crisis in the post-war period.[10]
Mortgage lending conditions have tightened abruptly, the housing market is presently characterized by an excess of 900,000 units of unsold housing inventories, and a sharply rising rate of foreclosures is increasing supply in an already saturated market. In addressing the present credit crunch, both the Federal Reserve and the U.S. Treasury are making the cardinal mistake of treating the problem as one of liquidity rather than as one of solvency. This would appear to be all the more surprising given that credit conditions today are no better than they were at the start of the crisis some eight months ago. It is also surprising in light of the fact that the International Monetary Fund is now estimating that total financial losses from bad lending could at the end of the day total around U.S. $1 trillion, which is a multiple of the losses that the banks have recognized to date.[10] NEW YORK, April 17 (Reuters) - Foreign central banks were net buyers of U.S. Treasury debt and U.S. federal agency debt in the latest week, U.S. Federal Reserve data showed on Thursday. The Fed said its holdings of Treasury and agency debt kept for overseas central banks rose $24.98 billion in the week ended April 16, to stand at a total of $2.251 trillion.[15] NEW YORK, April 17 (Reuters) - Treasury debt prices rose on Thursday after the Philadelphia Federal Reserve's business conditions index for April fell to its lowest level since February 2001, adding to other recent signals the U.S. economy is deteriorating.[16]
NEW YORK, April 16 (Reuters) - U.S. Treasury debt prices slipped on Wednesday as a robust stock market rally tempered government debt's safe-haven appeal, reversing bonds' earlier gains on weak housing numbers and relatively modest inflation data.[17] NEW YORK, April 16 (Reuters) - U.S. Treasury debt prices turned lower on Wednesday, as a rally in stocks extended, curbing the safe-haven bid for government debt, analysts said.[18]
Major U.S. stock indices were up more than 1 percent in late morning trade. "This leg up in equities above 1,350 for the S&P; 500.SPX has put some more pressure onto the Treasury market," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.[17] What you don't want is an index that skews the weights so you're leaning one way or the other. You'd like that interest rate risk to be smooth; with the Lehman Aggregate and any of those composite indexes that buy all the new issues that come in the door, depending upon the market, it could be leaning toward short maturities or long maturities. Today, with the yield curve so positive sloping, you would think that corporations and the Treasury and the agency market would prefer to issue shorter bonds rather than longer because it's cheaper. That's probably not good for the client. If it's good for the issuer, you'd have to question if it's good for the investor. These composite indices that buy all new issues really are slanted to the issuer, not the investor.[19] The best expression of interest rate risk is the Treasury yield curve, so the ETFs that we produce are all very clear expressions of interest rate risk. You know what you're getting; they're constant maturities, with basically no drift. These big bond indices, even the one- to three-year bond indices, are basically a garbage can of anything that fits in that area - they own them all.[19]
You cannot market weight a bond index correctly, so we equal weight it. Two, you've got to measure interest rate risk since it's so dominant. By not having constant maturities or very clear yield curves, you're overweighting parts of the yield curve all the time, and I don't think the clients understand what they are getting.[19]
Today's yields levels are around 50 basis points away from the lowest yields in modern history. For the two-year Treasury, for example, the lowest yield that we found was 1.073 and today it's in the neighborhood of 1.50, so we're 50 basis points away from the lowest yields of all time. That certainly plays havoc with money market funds, because after fees they struggle to show a yield or a return. You would think that would be temporary, but at the moment they certainly are doing damage to money market funds I should say. I don't know how much further they can go. They're already close to the lowest levels in modern history. Ryan: It certainly widens the spreads between Treasuries and corporate bonds - particularly mortgage banks. That's where the damage is done. It also has created some liquidity concerns. Here's the thing you might want to think about: Low interest rates were sort of the cause of the mortgage problem, so how could low interest rates be the cure? That one's a real tough scenario.[19] Two-year Treasuries were 165 basis points below the Fed funds rate on March 17. "But we think this spread needs to improve to around 20 basis points before we can say conditions are normal." Bank lending rates also remain far higher than they should be relative to the U.S. Treasury yields, while bond insurance rates, corporate bond yields and mortgage rates remain at lofty levels, according to Merrill Lynch.[20]
Treasury yields had jumped around 25 basis points since late last week, bolstered by data showing producer price inflation was accelerating, cooling expectations for an aggressive Fed rate cut later in the month.[14] "A one-two punch of higher inflation at the producer level and stronger manufacturing data socked bonds," said Bank of Tokyo/Mitsubishi chief financial economist Chris Rupkey in New York. "The Fed has already cut rates 300 basis points, and if inflation fires continue to burn, the Fed could even leave rates unchanged at this month's policy meeting."[4] The Beige Book should paint a very bleak picture of the economy, not different from what the eco data releases showed recently. It will probably also signal some mounting of inflationary pressures. This would put into the limelight the difficult position of the Fed. Cutting rates to help growth and the housing sector and borrowers, but restraint because of the still existing underlying inflation pressures. We stick to our expectation for a 50 basis points rate cut, but are aware that the Fed is eager to slow down the pace of easing and would be more than happy if they could indeed cut rates by only 25 basis points.[21] Governor Yellen was noncommittal about the next Fed action, but noted that the return of some calm in the markets have trimmed market rate expectations for the next meeting and added that the Fed must be careful not to cut rates more than needed, as inflation is a problem. Interestingly, she didn'''t rule out a recession in the H2. Governor Plosser didn'''t address the economy or policy in his speech. His comments afterwards went from growth concerns to inflation concerns and hinting that low real rates may have stimulated the commodity rally. Overall, it looks to us the Fed is looking for a 25 basis points rate cut at the next meeting, keeping its powder dry for later and at the same time showing its unease with inflation and we adopt our official view accordingly.[22]
If eco data weaken further and risk aversion would re-surface as for instance weak earnings results would hit equities, the Fed might feel obliged to go for a 50 basis points rate cut.[21] The Fed has cut the key federal funds rate a total of 300 basis points to 2.25% since September.[23] "The credit markets remain highly dysfunctional," said David Rosenberg, North American economist for Merrill Lynch & Co. Inc. The two-year U.S. Treasury remains 40 basis points below the federal funds rate. (A basis point is 1/100th of a percentage point.) "This is probably the best indicator in predicting better times ahead," he said.[20]
Even when food and energy are excluded, CPI prices in March are expected to have increased to 2.4 per cent from a year ago, which is well above the upper end of the U.S. Federal Reserve Board's comfort zone of 2 per cent. Those inflation rates are significantly higher than the 1.85 per cent yield on two-year U.S. government bonds, while the 10-year yield of 3.59 per cent lags the overall inflation rate that includes food and energy. [20] The yield briefly hurdled the 2.25 percent level of the Federal Reserve's benchmark target rate, telegraphing that bond traders are betting the Fed's rate easing cycle is near the bottom.[2]
With the Fed expected to continue cutting regulated rates, bond yields could go lower. "I would think rates will go below where they were in the last couple of recessions," said William Tharp, a senior economist with Dundee Wealth Management Inc. He expects the federal funds rate could reach 0.75 per cent from 2.25 per cent.[20]
The Fed is the major operator of the yield curve on the short end. You can see the long end doesn't believe it, so the long end hasn't gone down in yield like the short end, and it has created this tremendous slope. At the same time inflation looks like it's becoming more pronounced, so we just need interest rates to go up gradually, nothing dramatic. If they would go up gradually for the next five years, then pension funds could get out of their hole. It's hard to say about mortgages, but if inflation and interest rates go up, usually the value of your house goes up. That might help housing.[19] Well, the way you measure and understand interest rate risk is the Treasury yield curve. That is the best expression of interest rate risk.[19] Let's take the example of somebody who's going to retire in 10 years or 20 years. They could buy a ten-year zero and know exactly what their portfolio is worth in ten years. With today's interest rates they may decide that's not good enough, so they decide to take risk and instead of buying the ten year zero, they go and buy a portfolio of equities and whatever. In order to understand the relative risk and the relative rewards that they gained or lost, they should compare to the ten-year Treasury zero, the risk free asset, and then they'll understand if they're winning or losing. Most people compare their equity investments to the equity market.[19]
As you can imagine, in a one- to three-year index you've generally got bonds coming in and going out. Every three years you've got 100% turnover, so you're never quite sure which way it's going to lean. It could lean to the three year and then it could lean to the one year, or it could lean to the middle. It's not clear the interest rate risk you're going to get.[19] If you do not measure interest rate risk well, you don't have a very good bond index.[19]
The bond market is interest rate risk. That's what it's all about. It's 95% to 98% of the ballgame, and if you miss out on that one, then you don't have a good measurement of the bond market. There is some credit risk in the bond market and other factors come into play, but it's interest rate risk that dominates.[19] Ryan: Notre Dame did a study a while back that proved my whole point that interest rate risk is the dominant risk in bonds, what you call systematic risk or market risk. They looked at the major bond indices of Lehman Brothers, Merrill Lynch and Salomon Brothers in those days and showed that interest rate risk was 95% to 98% of these bond indices.[19] If bonds are 95% or 98% interest rate risk, then you want the best measure that tells you what that interest rate risk is. That would be our ETFs that have these constant maturities: no drift, no surprises.[19]
Philadelphia Fed President Charles Plosser said the central bank's short-term interest rate is already low enough to support growth. Dallas Fed President Richard Fisher yesterday said he's hesitant to lower borrowing costs further and warned against "inflating'' the economy out of the credit crisis in a speech in Chicago. "A combination of signs that the financial market is stabilizing and hawkish comments from policy makers put Treasuries on the defensive this week,'' said Nick Stamenkovic, fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.[8] From its high last fall, U.S. dollar LIBOR SWAP rates managed to decline before Christmas. That was after the Fed and other central banks injected gobs of credit to stabilize the financial system.[24]
For since last August, international oil prices have spiked from around U.S. $75 a barrel to over U.S. $100 barrel today. If maintained, this spike in oil prices will over the course of the year approximately offset the boost to household consumption that might be expected from the fiscal package's U.S. $100 billion household income tax rebate. At the heart of today's credit crunch is the continued weakening in the U.S. housing market, which is both reducing household wealth and compounding losses in the financial system. Over the past year, home prices at the national level have declined by 10 percent, while in the latest quarter they were declining at an annual rate of around 20 percent. These declines have already wiped out around U.S. $2.5 trillion in household wealth thereby contributing to a plunge in consumer confidence.[10] Two-year Treasuries have "value'' at current levels because increasing stress in the credit market may further erode economic growth, William O'Donnell, head of U.S. government bond strategy in Stamford, Connecticut, at UBS Securities LLC wrote in a research note today. "We believe short Treasury securities have real value here'' with two-year note yields close to a "major support'' level of about 2.15 percent, he said.[8] The two-year Treasury note fell 6/32. Its yield rose to 1.98% from 1.88% on Tuesday. The two-year note's yield has risen well above its multiyear low of 1.25% hit in mid-March, with bond investors now anticipating an end to the Fed rate-cutting cycle that began last September.[23] The falling Treasury yield has instead been an indicator of scared investors running to the perceived safety of the bond market. This time when the yield on the 10-year Treasury starts rising again it will actually be bullish for the economy.[25] As for the relatively low bond yields compared with inflation, "From a short-term perspective, U.S. Treasuries are the least ugly alternative compared with stocks and housing," Mr. Tharp said. "Investors are parking their cash and waiting for signs that the economy is close to stabilizing."[20]
A less dire report card from Citigroup set a positive tone in the stock market. Reduced risk aversion prompted investors to reallocate their assets -- moving away from Treasurys and tiptoeing back into stocks, corporate bonds and mortgage-backed securities.[26] Investors' willingness to buy riskier assets like stocks came at the expense of bonds, which have been the focus of safe-haven trade since a credit crisis emerged in August.[23] Investors' shift into stocks and other riskier assets diminished some of the flight-to-quality trade that has stoked strong demand for Treasuries since the credit crisis erupted last August.[17]
Treasuries fell Wednesday as a stock market rally grabbed the spotlight, reducing the safe-haven appeal of government debt and erasing early gains scored when weak housing data briefly boosted hopes for more Federal Reserve rate cuts. [23] Two-year Treasury notes fell sharply Thursday as expectations for Federal Reserve rate cuts shifted and investors sought to hedge against rising short-term funding costs.[27] "Despite expectations for an additional rate cut, longer-term Treasury yields are unlikely to fall much from current levels as investors remain wary of inflation," said a senior trader at a Japanese brokerage.[12]
Investors were eager to find out how much consumer prices rose last month after an unexpectedly large 1.1 percent increase in wholesale prices in March cooled expectations for an aggressive Fed rate cut, sparking hefty selling of Treasuries.[12] The Fed has cut the benchmark U.S. overnight lending rate, the fed funds target rate, by three percentage points since September to the current 2.25 percent.[5] U.S. short-term interest rate futures showed the implied chance of a deep 50-basis-point rate cut at the Fed's policy meeting at the end of April slipped to about 24% from about 42% shortly before the PPI data.[13] Traders said Treasuries could get a boost if earnings results from JPMorgan Chase or Wells Fargo reheat fears that banks are not near an end to write-offs stemming from mortgage-related losses. The Fed is expected to slash interest rates again later this month to forestall a recession.[12] Traders feared the high energy costs that boosted producer prices in March could filter through into March headline consumer prices. Short-dated Treasuries are more sensitive to the outlook for interest rates, and they too came under pressure.[13]
An inverted or negative yield-curve occurs when short-term interest rates yield more than long-term rates. That's an anomaly in fixed-income markets that has historically preceded a slowdown or an economic recession about 12 months later. At the time, most analysts refuted this price action, but it still proved incredibly accurate.[24] ECB'''s Stark even doubted whether the 4% interest rate level would be sufficient to ensure price stability, as short-term inflationary pressures have increased further.[21] Ryan: The Fed guides short-term interest rates, and we have short-term interest rates now at very low levels.[19]
When you lower interest rates, the present value of liabilities goes up just like for a bond. That could hurt the funded ratio, or assets versus liabilities.[19] I don't think lowering interest rates is the cure here. It certainly hurt the mortgage area and it certainly hurts pensions - which nobody seems to talk about - because the liabilities of pensions behave like bonds.[19]
The difference between LIBOR and overnight interest rates set by central banks is called the SWAP rate. This spread number must relax or narrow before credit markets get a "green" light to unclog and start lending as usual again.[24] Many now expect the U.S. central bank may trim rates by a shallow quarter percentage point at the end of this month and then pause its seven-month rate easing cycle for fear of exacerbating already accelerating inflation pressures.[9] The breakdown showed overseas central banks bought $8.68 billion in Treasury debt, leaving the total at $1.329 trillion. Foreign institutions bought securities from government-sponsored agencies like Fannie Mae (FNM.N: Quote, Profile, Research ) and Freddie Mac (FRE.N: Quote, Profile, Research ), adding $16.30 billion from those holdings to stand at a total $922.67 billion. Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries.[15] During deflations, the Fed is planning for inflation by stuffing currency into the economy, which later forms the basis of new credit and new deposits and thus purchases of Treasury debt by the banking system.[28] Alan Greenspan, the former Federal Reserve Chairman, is now describing the credit crisis as the most wrenching in the past sixty years. For its part, the Federal Reserve has invoked powers last used in the 1930s as part of its Bear Stearns' rescue program. In Congressional testimony last week, Ben Bernanke, the present Fed Chairman, has finally acknowledged that the U.S. economy could very well contract in the first half of this year.[10] WASHINGTON (AP) — The Federal Reserve has auctioned nearly $25 billion in super-safe Treasury securities to big investment firms, part of an ongoing effort to relieve credit strains. The auction — the fourth of its kind — was held Thursday, where the Fed auctioned another $24.999 billion in the securities.[29]
Some traders think that the process has begun by which the market adjusts to the Federal Reserve signaling that the ease cycle is over or is nearly done. That would not bode well for the 2 year note and would precipitate higher yields in that sector. This time of year The treasury market is seasonally weak.[30]
After fees, you would think there's little or nothing. Then you throw on top of that that the Lehman Aggregate, which most of them use as their benchmark, loses to the Treasury yield curve. That's really hard to believe - that a five-year Treasury zero has outperformed the Lehman Aggregate by over 20 basis points a year for 20 years. It's very hard to show that there's alpha in bonds.[19] The yield on the 10 year note is higher by 10 basis points and rests at a six week high of 3.70 percent and the yield on the Long Bond has climbed 8 basis points to 4.52 percent.[30] The yield on the benchmark 2 year note has jumped 10 basis points to 1.96 percent.[30] Traders clubbed the 5 year note as if were a baby seal and its yield surged 12 basis points to 2.82 percent.[30]
Yields on benchmark 10-year notes rose 10 basis points to 3.83 percent, reaching the highest since Feb. 28. They are up 35 basis points this week, the most since 2003.[8] Two-year yields rose 13 basis points, or 0.13 percentage point, to 2.23 percent as of 11:56 a.m. in New York, touching the highest since Jan. 30, according to broker BGCantor Market Data. The yield has increased 49 basis points this week, the most since November 2001.[8]
Overnight the weekly ABC consumer comfort index fell another 4 points to -39, a new cycle low. This afternoon, it starts with the April CPI and the March housing starts & permits reports, followed by the March industrial production data. The Fed publishes its beige book, a preparatory document for the next FOMC meeting, while Fed governors Yellen, Plosser and Mishkin will speak on U.S. economic outlook, education and monetary policy and the impact of the credit crunch on small business.[21] The bond market's retreat erased early gains scored on news that housing starts fell in March to the lowest level in 17 years and that the consumer price index for March rose less than economists had forecast.[23] The consumer price index is forecast to have increased on a year-over-year basis by 4 per cent in March, unchanged from the 4-per-cent rate in February, according to a survey of economists by Bloomberg.[20]
Today's release of the U.S. consumer price index is expected to show that inflation remains uncomfortably high.[20] Since that's the best an investor can reliably do, it doesn't make sense to spend too much time on the "final outcome". Income is going to matter more than investments as asset deflation continues, despite price inflation or price deflation! Taking into account the decline in the dollar, U.S. assets have declined massively from their 2001 high, and the "bounce" in 2003 really wasn't one.[28] Light bargain-hunting after the previous day's sharp fall supported Treasuries on Wednesday. Gains were limited as investors retreated to the sidelines ahead of a series of economic data and earnings reports from big U.S. banks, such as JPMorgan Chase (JPM.N: Quote, Profile, Research ) and Wells Fargo (WFC.N: Quote, Profile, Research ), later in the day. The Wall Street Journal reported on Wednesday that Merrill Lynch will take another $6 billion to $8 billion of asset write-downs and post a third straight net quarterly loss in its results due on Thursday.[12]
Earlier, data showed U.S. March housing starts fell more sharply than expected, re-igniting fears that the real estate market has further to fall before hitting bottom and sending investors into the safety of government bonds.[17] Global bonds fell considerably lower, even as the U.S. inflation data came out in line with expectations and the housing data were weaker than expected.[22]
A sustained break lower would however put our positive bond view into question. From a fundamental point of view, we nevertheless still like to hold on to this view given the persistent strong rise in the euro and the weak data out of the U.S. and the UK, which should lead to a further deterioration of the euro zone economic outlook in the coming months and may force the ECB'''s hand to cut rates.[22] It'''s clear that a dramatic weakening in activity will be needed to change the ECB'''s mind. We are still expecting a further weakening, but whether this will be sufficient remains to be seen. (Previously, a fall below 50 in the manufacturing PMI, which will be released next week, has always been consistent with an easing bias of the ECB). As such, the room for a steepening of the European yield curve is capped in the short term. In a longer-term perspective, we still think that the longer the ECB waits to cut rates, the more they may have to do. On the supply front, Germany will tap its 2-year Schatz for an amount of EUR 7 B. Recent demand for German bonds has been surprisingly low and this has already erased part of the recent outperformance of German bonds. This week'''s negative net cash flow won'''t support demand and yesterday'''s Italian bond auctions also disappointed.[21] Back in 2006, the Treasury yield curve turned negative, and accurately forecast an economic recession. Back then, I was writing about it - warning about this dangerous anomaly. Today, it's still my opinion that bonds represent the "smart money" in the financial markets.[24] When the economy is strong and deal-flow is rampant, credit spreads will narrow. That happened as we headed into 2007 last year. Junk bonds, which are below investment-grade credits, saw their yields hit historic lows versus Treasury bonds last spring. That was just ahead of the July sub-prime blow-up.[24] Prices of Treasury coupon securities plunged today as a rip roaring (rip either because it is rest in peace time or if rip van winkle awakened from a multi year sleep he would think it is still 1999) equity market rally which drained strength and cash from the bond market.Other factors contributed to the bond market calamity as well.[30] Yields on benchmark Treasury securities reached the highest levels in quite some time and broke through key support levels.[30]
Here's another graph that most investors never look at. It's basically a daily comparison of the 2-year Treasury yield minus the Fed Funds Target Rate. Whenever this graph shows a rising trend, it indicates improving monetary liquidity.[25] Why? Because the higher bond yields go above the Fed Funds Target Rate, the more bullish will be the implication for monetary liquidity.[25]
Note the banking system (and credit intermediaries in general) do not care about inflation or deflation as much as the spread between the lending rate and the cost of funds. With leverage, the banking system can usually make far more than they lose from inflation or deflation. All dollar holders (unless they've other side benefits) lose by dilution of dollar savings, which no longer has the same claim on goods. Anyone far away from the money spigot also loses, as their incomes change the slowest in response to changes in Fed policy.[28] Upside risks to inflation were more apparent (price increases in costs, but not wages). This will make the discussion at the FOMC meeting again lively with some governors pleading for restraint because of inflation risks and maybe arguing too that fighting the credit crisis is done better by other instruments than rates.[22] Based on the flash CPI, euro zone headline inflation is expected to rise from 3.3% Y/Y in February to 3.5% Y/Y in March. The Core CPI is also expected to rise from 1.8% Y/Y to 1.9% Y/Y. Despite current elevated inflation levels, the risk for both is still on the upside and following recent hawkish comments of the ECB, this may squash further hopes on an early ECB rate cut.[21]
An upward surprise on CPI, eventually accompanied with some better eco data (not our expectation) might blow further away expectations for a bigger-than-25 basis points rate cut at the end of the month, setting the stage for a correction in Treasuries.[21] A shallower 25 basis points rate cut on April 30 remains priced in. "The Fed has been working under the assumption that energy pressures are going to moderate and they have done nothing but go higher," Rupert said.[1] Currently the relevant May FF future contract trades at 1.945%, or 22.5% chance on a 50 basis points rate cut.[21]
The Libor rate for dollars climbed 9 basis points to 2.91 percent, the BBA said today.[8]
The two-year note yield, which responds closely to expectations for Fed rate moves, rose above 2 percent for the first time since late February.[9] The Fed's monetary policy committee meets April 29-30; financial markets now expect the Fed to adopt an additional quarter-point cut in the fed funds rate to 2%.[23] An index of home builder sentiment, hovering near all-time lows for the third month in a row, evoked less reaction, but some saw in the index a faint hint that the housing sector could be bottoming. Fed policy-makers are expected to cut rates again later this month.[4]
Bonds also reacted to news that the New York Fed's Empire State business conditions index jumped to 0.63 in April from -22.23 in March.[13] Bonds retreated early on news that prices received by U.S. farms, factories and refineries rose 1.1 percent in March, the largest gain since November, while core prices, which exclude food and energy costs, rose a tamer 0.2 percent.[4] An expected higher open for U.S. stocks curbed Treasuries safe haven appeal, further weighing on bond prices.[1] "People are looking around at other opportunities and Treasuries have suffered from that,'' said Thomas Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest lender.[8]
The good news is that PIMCO's Bill Gross, the world's savviest bond investor, has loaded-up on 30-year mortgage bonds guaranteed by Fannie Mae. These bonds yield almost 2% more than Treasury bonds. That's a bullish sign that investors are returning to the safest segment of the tattered mortgage market.[24] The Dow rose 257 points so Treasury prices fell and yields rose on investors' perception that there's less need for safety."[11] The two-year Treasury note fell 6/32 in price, and its yield rose to 1.87% from 1.76% on Monday.[13] The benchmark 10-year Treasury note price fell for a yield of 3.68%, up from 3.60% on Tuesday.[23]
A shallower 25-basis-point cut is still priced in. The 30-year bond's price fell 1 1/2 points, its yield rising to 4.44%, the highest in more than a month, from 4.35% on Monday.[13]
Every performance measurement report I've ever seen shows that active bond management has very little value added versus bond indices - in the neighborhood of 20 basis points for the median money manager versus the index, before fees.[19] At the time, high-yield bonds paid under two hundred basis points (2%) above T-bonds - unbelievably low.[24]
Ryan: Sure. A pension fund, for example, would most probably want to buy bonds that best behave like some part of their liabilities. That could be the entire yield curve or a certain part of it. Foundations and endowments maybe want to do only the short area because that tends to fit their time horizon.[19] Moderate gains in the equity markets contributed to the decline in bonds. Both in the U.S. and the euro zone the yield curve flattened.[21] Today, the ECB'''s monthly bulletin will also be published and may contain some further insight information on the current thinking of the ECB. On the supply front, Belgium yesterday sold EUR 5 B of its new 5-year benchmark OLO 54 Mar 2014 at a spread of 32 bps over Germany. Although this was at the lower end of the pre-announced range of 32-35 bps, the pricing was certainly not expensive compared to the other bonds on the Belgian yield curve.[22]
After peaking in 2003, the yield curve moving average dropped and declined all the way into 2007, which predicted a weak economy. Now that the 4-week moving average of the yield curve has risen to those healthy, bullish levels in reflection of monetary growth again, it's only a matter of time before we all see the improvement in the economy, and by extension, the stock market.[25] The online time the 20-day, or 4-week, moving average of the Treasury yield curve went well above 2.0 was in 1992-1993 following the early '90s recession (which led to major economic recovery). It happened again in 2002 following the 2000-2001 recession which led to major improvement in the consumer economy.[25] There is some lag time between the improving yield curve and economic performance, but probably by mid-summer you'll be seeing some noticeable improvements in the economy.[25]
The improvement in the yield curve has been truly head-spinning and incredible. In just a 1-week period in March, the yield curve rose from 2.57 to 9.78! That's the type of improvement you only see about once every ten years. It happens whenever the economy goes down too far and the monetary authorities become panic-stricken about restoring liquidity to the system.[25]
In California, San Francisco Federal Reserve Bank President Janet Yellen called U.S. economic prospects "unusually uncertain" and said growth had slowed to a crawl "at best." She said monetary and fiscal stimulus should give the economy a boost in the year's second half.[23] Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.[25] Stocks might have mustered a big rally yesterday, but the smart money in credit markets is showing a very different picture on the state of the American economy. As the bottom of this bear market eventually arrives, look to credit markets for signals that it's time to resume your buying.[24]
Tread carefully and heed the signs of credit, not stocks, for a true bear market bottom. EDITOR'S NOTE: As Eric watches for signs this credit crunch is easing, a related crisis is emerging worldwide. It's a dangerous cocktail of worldwide food and fuel inflation. This disastrous combination has already sent commodity prices sky-high and sparked protests, hoarding, strikes and deadly riots the globe over. [24] A decent definition of monetary inflation is (a) an increase in money, which (b) allows for the clearing of excessive credit expansion, which (c) later causes price inflation.[28] Party goods prices don't go up much because party goods aren't hard to produce (unlike oil or good medical research), so there's "huge productivity" and "no inflation" despite credit increases.[28]
A one-two punch of higher inflation at the producer level and stronger manufacturing data socked bonds, said Bank of Tokyo-Mitsubishi's chief financial economist, Chris Rupkey. [13] Any recommendations on how to get educated on the whole bond topic? Maybe a class at a local community college or something? My TIPs ETF keeps going down at the same time as reports come out showing increases in inflation.[19]
The spread between risk-free Treasury debt and other bonds like corporate debt and junk bonds is called a "credit spread."[24] Investment-grade bonds are starting to look increasingly attractive - particularly as credit spreads start to stabilize among highly-rated corporate debt instruments and Treasury bonds. It's still too early for bargain-hunting in equities and riskier debt markets.[24]
Treasurys were left in the cold Friday as surging stocks and improved risk appetite sent investors away from low-risk, low-yielding government debt.[26] Although the investor would have lost the compound stock gains from 1980 to 2000 in the short run because of portfolio rebalancing, the risk profile is far different as the gains are not subject to catastrophic losses and periodic buying means the average asset isn't bought "at the peak".[28] The strategy works best when emotion is taken out, and varying the amount of savings means the investor is exposed to the emotions of the market and will usually tend to do worse. If an investor had done this since 1980, by 2000 they would have owned a substantial amount of gold and non-dollar assets by taking their stock gains and buying gold and commodities.[28]
Bonds and credit spreads will provide a far more accurate gauge to global investors than stocks, which tend to harbor false recoveries or "sucker" rallies.[24] I would have to see a much higher default rate among American high-yield or junk bond companies before turning bullish on the stock market.[24] The intense fear of the last several months have temporarily overpowered what used to be an inverse relation between bond yields and the stock market.[25]
Normally, a falling 10-year Treasury yield would be interpreted as bullish for the stock market.[25]
In stark contrast, the S&P; 500 Index in mid-2006 was still in bull market mode, defying the repeated warnings from the Treasury market as yield inversion grew louder.[24] While Treasury bond inversion accurately forecasted trouble ahead, that wasn't the case for the Dow or the S&P; 500 Index.[24]
Yes - a very good article. I still lean to Treasury bond ETFs because they do acquire higher return Treasuries when the rates trend up.[19] Most high-risk credit markets, namely high-yield or junk bonds, also continued to race higher even as the Treasury market began predicting trouble.[24]
According to the Journal, credit spreads for higher risk bonds, short-term inter-bank lending rates and investment-grade corporate financing remain under severe pressure.[24] To say it differently, maturity and duration dictate interest rate risk. What you want is something that is very clear on its interest rate risk. If you have a product or an index that is not clear on its interest rate risk, then you're going to have a problem.[19] Ryan: One of the PowerShares ETFs is based on one of our laddered indices. With that kind of index you do not have any interest rate direction - you want to be interest rate neutral, and that's when you buy them all.[19]
Ryan: I just see it as a solution to the pension problem and you've got to rank priorities, which can be very difficult. It's pretty obvious that the banks didn't go to America for their financing. They went elsewhere, and look what Citicorp and others paid for their financing. They didn't pay American interest rates.[19] Don't think that America's interest rates are what the rates are when you're desperate and need money.[19] The LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world and is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. As such, it can be used to measure levels of fear among lenders related to the subprime fiasco.[25]
Notice the Libor rate has been coming down conspicuously ever since then and has not approached the high levels of fear of over two months ago. The public remains afraid, yet the monetary powers are clearly not as worried over the state of U.S. financial affairs as they were earlier this year.[25] There can be no doubting that housing is the major asset in U.S. households' balance sheets while mortgage lending is a major item for the U.S. financial system. As such, stabilizing the housing market would appear to be a necessary condition for breaking the present vicious cycle between a weakening economy and a deteriorating financial system. The longer policymakers fail to squarely face up to this issue, the longer and deeper the recession is likely to be.[10] A double brilliant economist decides that there's an even bigger market to inflate and that will bail the small economy out. The idea is to put "short rates at 1% and leave them there" to help the owners of financial assets maintain their values.[28]
The real assets have been consumed while financial assets have soared. despite no apparent overall price inflation.[28] Price inflation results from an increase in total spending (volume x prices) in greater amount that the economy can reliably sustain over time.[28] The persistent rise in energy and food prices indeed indicates that the short-term inflation risks are still on the upside.[21] Several ECB governing council members continued to warn on the upside inflation risks. ECB'''s Garganas, who expected last week the inflation rate to come down in the months ahead, sounded now much more pessimistic and said that '''inflation is not foreseen to be approaching the 2% mark this year'''.[21] Inflation has moved up in the markets and media attention and while the Fed is still expecting inflation to slow, there are risks on that.[21] Regarding trading, Treasuries were rather hard hit following surging PPI inflation and a better-than-expected NY Fed manufacturing survey.[21] During inflations, the Fed is orchestrating a disinflation / deflation and creating a resurgence of non-bank demand for treasuries.[28]
The flight to safety is costing investors in U.S. Treasuries a lot of money when inflation is taken into account.[20] While the report issued today was not ugly,the surge in commodity prices and agricultural prices reminds investors that there will be no inflation relief in the near term.[30]
With the two-year note facing headwinds, investors also unwound bets on a further steepening of the yield curve, the gap between short- and long-term yields.[27] The price of the two-year note was down 6/32, or $1.875 per $1,000 invested, at 99 4/32 to yield 2.21%; the five-year note was down 16/32 at 97 22/32 to yield 3.01%, the 10-year note was down 19/32 at.[26] The Treasury's two-year note sale on April 23 may tally $30 billion, according to Jersey City, New Jersey-based Wrightson ICAP, which specializes in U.S. government finance and is a unit of the world's biggest inter-bank broker. That would be the most ever sold for the maturity, according to the Treasury.[8] In the four auctions held so far, the Fed has provided close to $158.95 billion worth of the Treasury securities to financial firms.[29] At last week's auction, the Fed had bids for $33.95 billion worth of the securities — less than the $50 billion in securities that the Fed was making available. Some analysts read that as a hopeful sign that credit turmoil in this part of the market was easing a bit.[29]
The final consideration in the re-liquification process is the daily securities lending volume. The Fed has been loaning securities at a rate not seen in its history. The combined message of this action is that not only is the liquidity crisis a thing of the past, but the widespread fears of further economic deterioration are without foundation.[25] The process right now isn't likely to happen fast enough, as millions of homeowners cannot get loans under new standards, even under FHA. Even though the Fed has put the U.S. government on the hook by increasing their holdings of riskier securities, the net effect isn't (yet!) inflationary.[28]
Noted economist Ed Yardeni noted back in February that, 'ARM resets are less threatening partly because of the Hope Now Alliance (a.k.a., the 'teaser freezer'), but mostly because the Fed has lowered the federal funds rate by 225bps since last September to 3%.[25] LIBOR or the London Interbank Offered Rate has historically traded slightly above the official Federal Funds rate.[24]
Despite the Federal Reserve's best efforts to lubricate the wheels of the funding markets since last summer, inter-bank lending rates remain high.[24] For now stay nimble and do not be stubborn. The Federal Reserve released its Beige Book today and the contents of that analysis only briefly halted the rise of the equity market. That report noted that economic conditions had deteriorated since the last report. It specifically noted that growth had slowed in nine of the twelve Fed districts and blamed anemic real estate markets and a slowdown in consumer spending.[30]
Change in reverse repos = 3,475. 918,827 - 17,774 - 3,475 = 897,578. Despite the extension of temporary liquidity to investment banks, those increases have been taken out by other Fed actions. Base money (cash and reserves) went up by 1.5%. and this occurred during one of the stiffest ongoing credit corrections in 70 years. [28] Reverse repos are the Fed's way of reducing day-to-day liquidity and that is money not available to the system. 17,774 - 3,475 = 14,299. The other effects (like the change in the balances of the Treasury) very likely have minimal effect right now, so we're going to ignore those.[28]
The Treasury yield curve is calculated by dividing the 10-year Treasury yield into the 3-month T-bill.[25] The benchmark 10-year Treasury note yield rose to 3.60% from 3.52% on Monday.[13]
The yield differential between the 2year note and the 10 year note closed the day at 174 basis points.[30] Shortly thereafter the Treasury will announce the May refunding. If I am right, I suspect that yields will be rising but I would be looking for spots to buy throughout this stretch and the reward will come later in the year.[30] Today'''s data, including CPI, may be a good test for the Treasury market and there are risks for a downward correction.[21] Regarding trading, Treasuries were rather hard hit and fell sharply for the second day in a row, as friendly data (crashing housing starts and as expected CPI) were unable to offset a return in risk appetite that was reflected in rallying equities.[22]
Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.[22]
While it can't be used to pinpoint turning points in the bond market, it does provide a general idea that investors should expect a trend reversal at some point in the not-too-distant future.[25] Actually, the message of the bond market is one of the more exciting and optimistic messages being sent anywhere in the financial markets right now and it behooves us to pay close attention to what bonds are saying.[25] The collective message of the bond market is one that is being almost entirely ignored by the financial press.[25]
Which weights are the best? Basically 100% of the bond indices that are used out there are market weighted. It is impossible to market weight a bond index. You need to know the amount outstanding, and as simple as that sounds we don't know the amount outstanding on Treasuries because they're stripped. Same thing for agencies, and if your index has mortgage-backed securities they all have prepayments, which is not known for usually 45 days after the end of the month. [19] MORTGAGE-BACKED SECURITIES encompass a wide spectrum of instruments ranging from synthetic illiquid CDOs or collateralized debt obligations to bonds issued by government agencies like Fannie Mae (FNMA) and Freddie Mac (FHLMC). You'll be able to tell when stability returns to the mortgage-backed area by watching the mortgage-backed derivatives and the more conservative mortgage bonds guaranteed by FNMA. When both of these numbers bottom, that's a sign this credit crunch is easing.[24] Corporate bond supply was heavy with GE issuing $8.5 billion of new debt.[30]
At the moment, the junk bond default rate is under 2%. That suggests many more financially leveraged and indebted companies will head into bankruptcy or credit default.[24] Until credit spreads for riskier bonds begin to tighten or narrow significantly, the economy remains on the rocks.[24] A growing economy would also give wage earners a "slice" of a bigger pie as stable currency increases in value (a risk-free gain by deferring consumption in the form of gentle deflation) if it were not for substantial waves of money-substitutes (credit) which dilutes the value of labor in favor of powerful financial interests in concert with the government.[28]
Reserves haven't been binding for a decade, true. and all that time credit has expanded, which means leverage is higher, not lower. That means if there's any financial accident, leaving reserves roughly the same is a policy of deflation.[28] The above credit market check list is by no means absolute. If you're looking for a bottom in stocks, these numbers can help you gauge when it's time to buy again. Of course, I'll continue to watch all these indicators for signs of a bottom.[24] All times are Eastern United States. Index pricing and Stocks On The Move data may be delayed more than 20 minutes due to the auto-refresh schedule for these features.[13] Among major stock indices, the Dow.DJI rose 2.1 percent, the S&P; 500-stock index.SPX advanced 2.3 percent, and the Nasdaq composite index.IXIC climbed 2.8 percent.[11]
The Philly Fed manufacturing index is expected to show a slight '''improvement''' to - 15 from a horrendous -17.4 in March, but the unexpected rebound in the similar NY Fed index raises the uncertainty about the outcome.[22] The lending program is one of several extraordinary actions the Fed has taken recently to limit damage from a trio of crises — housing, credit and financial.[29] If the Fed needs to hammer credit expansion down to make sure there's a market for treasuries, you can bet it will happen.[28]
If the authorities step in and "save" the banking system from bad credit, you can bet that if the central bank merely maintains the old credit level and doesn't expand credit, many prices are still going to rise from long neglect. [28] The central bank has to shrink credit to stop prices from rising -- genuine credit and monetary deflation.[28]
Until LIBOR SWAP rates decline and return to normal spreads above central bank monetary targets, the crisis continues.[24] Euro LIBOR has also historically traded just above the European Central Bank's official base rate since the currency was introduced in 1999.[24]
In the latest move, total commercial bank credit (loans-deposits) is growing at an annual rate of 11%.[28]
Ongoing hawkish comments of the ECB however made clear that the ECB remains primarily concerned about inflation and is not considering a rate cut in the near term.[21] ECB'''s Weber will speak on financial markets, economic forecasts and monetary policy and may sound again very hawkish. Last week, ECB'''s Weber already said that he doesn'''t see any room to cut rates.[22]
Tuesday's data prompted investors to doubt the possibility of a half-percentage-point cut due to persistent inflationary pressure.[12] CREDIT HEDGE FUNDS represent the largest segment of total hedge fund assets, now an estimated US$2 trillion. Combined with leverage, credit hedge funds are the dangerous pariahs of the investment world in 2008 as more of their investors scramble to redeem assets.[24] You certainly have a currency risk, which has been a winner in the last five years or so, but that could turn around. It's an added type of credit risk, so you better hope you get paid for it. When I ask people what their objective is, if the objective is denominated in dollars, you would think that the assets should be denominated in dollars, or you have more risk.[19]
At some point, things get tough. Our hero and friends will have to start working with a lot less factory, a lot less assets, with even bigger debt - and the banks are really going to be upset about their collateral when they find the productivity of their debtors far too small to handle the debt load.[28] Demand for safe-haven government debt had also fallen as there have been no major upsets on big financial firms' report cards, with investors growing more confident about the outlook for the troubled financial sector. The market waited for first-quarter results from Citigroup (C.N: Quote, Profile, Research ) due later in the day to see whether its earnings would bolster views that the worst has passed for bank losses stemming from the troubled mortgage sector.[14]
Citigroup, the biggest U.S. bank by assets, reported a first-quarter net loss of $5.11 billion. [8] Bond prices finished at the lows for the day, on the defensive before Wednesday's report on U.S. consumer prices.[13] A very poor German Schatz auction further weighed on bond sentiment. It was however the belly of the curve that underperformed in the EMU, while the curve flattened in the U.S. Following yesterday'''s drop, the technical picture has deteriorated in the U.S., while the Bund is coming close to key support levels in the EMU.[22]
Regarding the TIPs ETF, Cromag, I've got them, but like my bond funds, I diversified with a portion of WIAs which has foreign exposure but less volatility with a higher yield.[19]
The Yield Curve also tells you how much you are being rewarded to take risk.[25]
The price of the 1 3/4 percent security due March 2010 fell 1/8, or $1.25 per $1,000 face amount, to 99 2/32. [8] The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing slump.[29]
SOURCES
1. TREASURIES-Prices down as investors pare US rate cut bets | Markets | Markets News | Reuters
2. TREASURIES-Prices fall as investors slash US rate cut bets | Markets | Markets News | Reuters
3. TREASURIES-Prices down as investors mull end of rate cuts | Markets | Markets News | Reuters
4. TREASURIES-Prices fall as data dim prospects for big rate cut | Markets | Bonds News | Reuters
5. TREASURIES-Prices down, mulling end of rate cut cycle | Markets | Markets News | Reuters
6. US RATE FUTURES-Prices tumble on equities rally | Markets | Markets News | Reuters
7. TREASURIES-2-year note yield rises to 2.25 percent | Markets | Markets News | Reuters
8. Bloomberg.com: Worldwide
9. TREASURIES-Prices rise on soft stocks, shrug off claims | Markets | Bonds News | Reuters
10. AEI - Short Publications - Washington's Dangerous Policy Delusion
11. TREASURIES-Prices fall as stock rally crimps safety bid | Markets | Bonds News | Reuters
12. TREASURIES-Edge up in Asia before data, bank results | Markets | Bonds News | Reuters
13. Investor's Business Daily: Bonds Rocked By Strong Factory Data As Hope Fades For Big Interest Rate Cut
14. TREASURIES-Rise in Asia, Citi earnings eyed | Markets | Markets News | Reuters
15. Foreign central banks boost US debt holdings - Fed | Markets | Bonds News | Reuters
16. TREASURIES-Prices up after weak Philly business activity | Markets | Bonds News | Reuters
17. TREASURIES-Prices fall as stocks' rally overshadows data | Markets | Bonds News | Reuters
18. TREASURIES-Bond prices slip as stocks extend gains | Markets | Markets News | Reuters
19. Talking Fixed Income Investing with Ron Ryan - Seeking Alpha
20. globeandmail.com: Market Blog - Inflation eats into Treasury yields
21. US Treasuries lost more ground on unfriendly eco data and bullish equities
22. US Treasuries crumble on rallying equities
23. Investor's Business Daily: Investors Dump Treasuries For Stocks As Earnings Undermine Safe-Haven Bid
24. Exactly When Will This Credit Crisis End?
25. Forget the Headlines, Listen to the Bond Market!
26. Free Preview - WSJ.com
27. Free Preview - WSJ.com
28. Why The Inflation - Deflation Debate Doesn't Matter - Seeking Alpha
29. The Associated Press: Fed auctions nearly $25 billion in Treasury securities
30. Bond Expert: Wednesday Wrap - Seeking Alpha
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