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Apr-21-2008Five-Year Claims Yield Sweet Spot With Inflation Up (Update2)(topic overview)
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April 19 (Bloomberg) -- U.S. Treasuries fell, pushing two- year note yields to their biggest weekly increase since 2001, as surging stocks and signs of quickening inflation reduced the appeal of 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. [1] April 18 (Bloomberg) -- U.S. two-year Treasury notes posted 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 policy makers signaled this week they're hesitant to drop rates further.[2]
Two-year notes slumped for a sixth day on speculation central bank efforts to reduce corporate borrowing costs will make equities and asset-backed debt more attractive than government debt. Futures contracts show traders are betting the Federal Reserve will limit any interest rate cut at its meeting ending April 30 to a quarter percentage point.[3] Five-year debt returned 2.5 percent between April and June, compared with a gain of 0.9 percent by two-year notes. The Fed cut its benchmark rate in June, the last change before it began raising borrowing costs a year later. Traders see no chance the Fed will lower rates by a half- percentage point to 1.75 percent at its next scheduled meeting on April 30, down from 56 percent odds a month ago, according to futures contracts on the Chicago Board of Trade.[4] The slide in Treasuries comes before the government announces today how much it will sell in two-year notes on April 23 and how big a five-year sale will be on April 24. It is also scheduled to auction $8 billion of five-year Treasury Inflation Indexed Securities tomorrow. Futures on the Chicago Board of Trade show a 98 percent chance the Fed will cut its benchmark rate by a quarter percentage point to 2 percent at the end of its meeting on April 30.[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 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 100 percent chance the Fed will cut its target rate by just a quarter-point to 2 percent this month.[2] The two-day climb of 17 basis points was 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 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.'' 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. The decline in two-year notes pushed their yields to within about 157 basis points of those on 10-year notes, the smallest difference since February.[1]
"The Fed may not be easing monetary policy as much as the markets had thought,'' said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York. The two-year Treasury yield rose 39 basis points this week, or 0.39 percentage point, to 2.14 percent, according to bond broker BGCantor Market Data.[1] Two-year yields rose 4 basis points today, or 0.04 percentage point, to 2.15 percent as of 4:05 p.m. in New York, and touched 2.26 percent, the highest since Jan. 30, according to broker BGCantor Market Data. The yield increased 40 basis points this week, the most since November 2001.[2]
Economists had forecast a drop of 0.1 percent. A separate Fed report this week showed New York manufacturing unexpectedly grew in April. The decline in two-year notes pushed their yields to within 158 basis points of those on 10-year notes, the smallest difference since Feb. 4.[2]
A source familiar with the transaction said on Sunday that subprime mortgage-hit National City (NCC.N: Quote, Profile, Research ), a large U.S. Midwest regional bank, is close to getting a $6 billion to $7 billion injection from a group of investors led by private equity firm Corsair Capital. "The stock market's gains last week, stock index futures' rebound to almost unchanged this morning, stable LIBOR, negative sentiment on the size of the Fed's prospective interest-rate cut next week, new supply from the Treasury of two- and five-year notes this week, plus a Fed Term Auction Facility (TAF) which will add to supply in the market, all of this is weighing," said John Spinello, chief fixed-income technical strategist at Jefferies.[5] Economic growth slowed in nine of 12 U.S. districts since February, hurt by "anemic'' real-estate markets and a slowdown in consumer spending, the Fed said April 16. Federal Reserve Bank of Dallas President Richard Fisher said the next day that he's hesitant to lower rates further, warning against "inflating'' the economy out of the credit crisis. As investors realize the economy isn't going to rebound quickly and the yield curve flattens, they're likely to be thinking "aren't you happy you were in the five-year and not the two?'' said James Cusser, who manages $1.5 billion at Waddell & Reed Inc in Overland Park, Kansas. Five-year notes remain the "safest'' Treasury security, he said.[4]
The artificially low rates led to overinvestment in housing and other malinvestments. This eliminated much of the stigma from discount window borrowing, enabling troubled banks to go to the Fed directly for funding. After the massive increase in discount window lending proved to be ineffective, the Fed became more and more creative with its funding arrangements. The upshot of all of these new programs is that, through auctions of securities or through deposits of collateral, the Fed is pushing hundreds of billions of dollars of funding into the financial system in a misguided attempt to shore up its stability. It targets the primary dealers, those largest investment banks who purchase government securities directly from the New York Fed. Instead of being forced to learn their lesson, these poor-performing banks are being rewarded for their financial mismanagement, and the ultimate cost of this bailout will fall on the American taxpayers. Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator.[6] NEW YORK -- Two-year Treasurys gave up gains Monday in a seesaw session as upcoming bond sales weighed on the government debt market. Worries about rising price pressure, increased bets that the Federal Reserve is approaching the end of its rate-cutting cycle and optimism that liquidity-pumping by global central banks has pulled credit markets away from the worst of the crisis also sapped safe-haven flows into the government debt market. The Treasury Department increased the size of bond auctions slated for this week amid weakening tax receipts and rising financing needs as the economic stimulus package is set to roll.[7] Which is going to be bad news for banks, building companies, retailers, borrowers, of course, and the U.S. economy. The yield on the 10-year Treasury bond hit a high of 3.85% on Friday from less than 3.50% a week earlier as investors sold bonds on expectations that the Federal Reserve could soon end its rate-cutting cycle.[8]
Investor willingness to buy stocks bespoke a less-dire outlook on the economy's prospects, a verdict that led to the view that the Federal Reserve might slow the pace of monetary easing. Two weeks ago, when the release of the March jobs report suggested that the U.S. had entered a recession, the dominant view was that the Fed would cut its benchmark federal funds rate to 1.5% from its current 2.25% level, with a half-point cut likely on April 30.[9] NEW YORK, April 21 (Reuters) - U.S. government bonds slipped on Monday in the face of stock market resilience and fading hopes that the Federal Reserve would continue its campaign of aggressive interest rate cuts.[5] April 21 (Bloomberg) -- Bond investors anticipating faster inflation and the end of interest- rate cuts by the Federal Reserve are finding refuge in five-year Treasuries.[4]
The two-year note, which often tracks traders' expectations for Federal Reserve rate cuts, fell to 99.08 from 99.10 in late trading Thursday, sending the yield up 4 basis points to 2.13%. This is the highest end-of-day level for the yield since February, according to FactSet Research.[10] Global bonds made a roller-coaster ride, hammered early on by stronger equities, reversal of safe haven inflows and declining Fed rate cut expectation. Later in the U.S. a sharp rebound occurred, despite equities keeping most of their gains, suggesting that profit taking on shorts was at the origin of the rebound. In the cash market, this left U.S. Treasuries mixed in the close, the 2- year yield still up 6.8 basis points, the 5-year nearly flat, while 10- and 30-year yields even fell between 1 and 2 basis points.[11] The spread for the so-called yield curve is currently 1.6 percentage points, compared with an average of 0.36 percentage point during August, when the rate of inflation was less than half the current 4 percent annual pace. "We favor fives versus both ends of the yield curve,'' said Naruki Nakamura, a portfolio manager in Tokyo for Fischer Francis Trees & Watts Inc., which oversees more than $30 billion of bonds worldwide and is part of BNP Paribas SA, France's biggest bank. The Fed will cut its rate to 1.75 percent and leave it unchanged for at least a year, he predicts.[4] In remarks last week several senior Fed members voiced concerns about rising prices and inflation. That, plus the performance of markets and the ease with which big U.S. banks have raised $US20 billion in a week in new capital, has set off a round of speculation about a rate sit and not a cut, at the end of the month.[8]
A one percentage point rise in official rates and up to 0.40% in extra increases from the banks in less than year is a very sharp tightening in policy and seems to have come at a time when the overheating economy was just starting to tip over into slowdown. That slowdown has accelerated. This week we will see just what level of price pressures remain in the economy. For the Fed, it's the reverse: it has cut rates by three percentage points since September (our rate first of four official rises happened in August, three days before the credit crunch erupted).[8] A week ago, traders saw a 54 percent chance of a quarter-point cut, with the rest of the bets on a half-point cut, futures show. The Fed has slashed its benchmark rate by 3 percentage points since September to 2.25 percent to avert a recession and spur lending. Industrial production rose 0.3 percent last month, after a 0.7 percent drop in February, the Fed said this week.[2]
Two-year note yields reached 2.26 percent yesterday, the highest since January, surpassing the central bank's target for the first time since June 2006. Futures on the Chicago Board of Trade show a 98 percent chance the Fed will cut its target rate by just a quarter-point to 2 percent this month, and a 4 percent likelihood the bank will keep rates unchanged.[1] The highest yields relative to two-year notes since 2004 make five-year securities attractive at a time when the central bank is running out of room to lower borrowing costs. Plus, they are less sensitive to changes in inflation expectations than longer-maturity debt, a benefit with oil above $110 a barrel and corn close to a record high.[4]
Some investors may find value in two-year notes 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.[2] 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.[2]
Two-year note yields also climbed before a government auction of the maturity next week that may tally $30 billion, the biggest ever.[1]
Fischer Francis holds a greater percentage of five-year notes than contained in the benchmark it uses to measure performance, Nakamura said. The yield on the benchmark 2 1/2 percent note due in March 2013 rose 32 basis points last week to 2.89 percent as its price fell 1 14/32, or $14.38 per $1,000 face amount, to 98 7/32, according to BGCantor Market Data.[4] "The Treasury market has a big liquidity and flight- to-quality premium built into it.'' Yields on benchmark 10-year notes rose 24 basis points this week, the most since May 2004, to 3.71 percent.[1] The benchmark 10-year note yield was little changed at 3.73 percent, after earlier touching 3.85 percent, the highest since Feb. 28. It rose 26 basis points this week, the most since 2004.[2]
The three-month Libor in U.S. dollars jumped nine basis points to 2.9075%, according to British Bankers' Association data and FactSet Research. That's the biggest increase since the credit crunch hit in August and follows a jump of 8 basis points on Thursday. Concerns emerged this week that some banks may have been under-reporting the rate at which they've been lending to each other, and rates have been rising since then. A spike in these short-term Libor rates puts pressures on positions betting short-term yields will keep falling, causing traders to sell bonds with short- term maturities.[10] U.S. 10 year bond yields rose by more than a quarter of a per cent last week to finish at 3.71% after briefly reaching over 3.8% at one stage late last week. In fact there was a sell off of U.S. Treasuries as investors took their cash to put back into the market and into commodities and other riskier investments. (Within reason, no one is asking, 'more subprime mortgages, please'.) The Consumer and Producer Price Indexes for March were not too worrying, but in the year to the end of that month, they rose over 6% and 4% respectively, as oil, transportation and food prices soared. Consumer demand is being battered by the rising cost of petrol, heating oil and food: and the Fed's version of inflation strips out most of these costs (as does our core readings of inflation here).[8] I guess we need to change that. Should we come right out and say that the U.S. Dollar and all of our obligations are now backed by worthless mortgage bonds? This is essentially what the Fed has done by accepting this junk onto its balance sheet. The Fed has told us though that these loans are only temporary, in many cases as few as 28 days. Then the banks will have to give back the Treasuries they've been lent and re-assume the worthless bonds. Does this honestly make sense to anyone? How will these banks be able to repair billions of dollars in damage in a month's time? They won't. These loans, while starting as temporary will quickly become permanent. This will likely be done behind closed doors and out of the public eye with no announcement or fanfare. It is fairly easy to see where things go from here. Even assuming a best-case scenario in which we have reached the bottom in credit losses, we have only seen about half of those losses. That means we are in the eye of the hurricane with billions more in losses to come before it is truly over. That means more Treasuries moving out of the Fed, and more worthless mortgage bonds going in.[12] Many have now even boldly called a bottom in the losses stemming from the subprime mortgage crisis. In the Fed's defense, it has been extremely creative in using alphabet soup acronyms, fancy formulae, and dazzling doublespeak, all with the single purpose of placing money in the hands of those who have misbehaved without actually saying they're doing it. They have lent Treasuries and other assets off their balance sheet while accepting onto it a plethora of worthless mortgage bonds, credit derivatives, and other dubious instruments of the once gilded age of modern financial genius. On the weekend of March 15-16, they became the final backstop: the lender of last resort.[12]
While some might argue that from an intrinsic value standpoint there is essentially no difference between U.S. Treasuries and junk mortgage bonds, I would opine otherwise, choosing to point out the possible perceptions of this transition. Much of the reason we have been able to borrow from foreigners all these years is that the Dollar, and the obligations of the United States have been backed by the full faith and credit of the U.S. Government.[12] "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.[2]
Regarding trading, European bonds were sold off on Friday, although a late rebound in the U.S. Treasury market helped to recoup part of the large intra-day losses. As such, bonds confirmed Thursday'''s break below key support levels that have put our main scenario for three ECB rate cuts this year into question. Following the break lower, we are sidelined and await this week'''s business confidence surveys before deciding whether to change our fundamental view.[11] The Treasury calendar is busy though as a 2-, and 5-, and 5-year TIPS auctions are scheduled. These might give us a clue as to how hard sentiment was hit last week. Besides these, there might be some additional interest in the details of the UK mortgage plan to provide longer-term funding and to the Bank of Canada meeting that is expected to end with another 25 basis points rate cut.[11] Given the easing of strains in financial markets, the increased inflation risks and the view that liquidity measures are maybe better in coping with the strains in markets than lower rates, we lowered earlier last week our rate cut expectation for the April 30 meeting to 25 basis points. This is now also exactly priced in.[11] Regarding trading, last week, Treasuries sold sharply off and the curve flattened, as risk averse behaviour linked to the financial system woes faded and Fed rate cut expectations declined in a pronounced way.[11]
We are, however, a bit unsettled because swap spreads widened too in a weekly perspective, as did Libor and liquidity spreads, something one shouldn'''t expect in a climate of increasing risk appetite, even if on Thursday/Friday swap spread did narrow a couple of basis points. Regarding the Libor, it seems that it was priced too low compared to the effective borrowing rates in the interbank market and following an intervention of the BBA, Libor rates rose, bringing them better in line with rates on effective transactions. Various Fed governors signalled their unease with the FOMC aggressive easing cycle last week. While one should be not surprised to see such unease coming from Fisher or Plosser, also Yellen and Warsh, both close to Bernanke, suggested that the Fed might slow the pace of easing.[11] The Fed last month made up to $200 billion available to banks in return for debt including mortgage-backed securities. It is scheduled to lend funds today under its so-called Term Auction Facility, a twice-monthly auction of money to banks. The risk of Australian companies defaulting on their debt fell for a fifth straight session, credit-default swaps show. The Markit iTraxx Australia Series 9 Index decreased 6.5 basis points to 106.5 basis points, according to Citigroup Inc. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.[3] The Bank of England will today announce a plan to swap about 50 billion pounds ($99.8 billion) of government bonds for mortgage-backed securities, people familiar with the matter said. Australia's central bank today bought A$780 million ($734 million) of mortgage-backed bonds in its biggest purchase of this debt to support the nation's home-loan securities market.[3] The BOE will lend government bonds to dealers and receive in exchange mortgage securities. This is real long term stuff as the Bloomberg story reports that the term of the action is one year and will be renewable for 3 years. They are providing $100 billion of this facility. That is not the action of a central bank blithely observing a problem but a reaction of an organization with deep concerns.[13]
Retail sales are very soft. The $US162 billion one-off rebate will be issued next month which may help the Fed justify sitting on its hands for a couple of months. It has saved Bear Stearns and started funding the U.S. banking and financial sector with billions of dollars of cash a day via special auctions to swap poor quality asset backed securities for high quality U.S. Treasury securities which are second only to cash. That happened from March 14 to March 17 and that changed the atmosphere in markets, which have risen sharply since in the U.S. and Asia (except China). [8] U.S. Treasury debt prices were on the defensive last week as investors favored riskier assets like stocks over safe-haven government debt.[5] Short- and medium-term Treasuries slipped Friday, as investors favored riskier assets like stocks over safe-haven government debt.[9]
Treasurys slumped Friday, with the biggest declines in two-year bonds as traders continued to react to a jump in Libor rates and investors returned to stocks after a wave of earnings reports.[10] After rising to a nearly three-month high, the two-year Treasury note yielded 2.14% in late trade, up from 2.11% on Thursday, as bond traders bet that the Fed's rate easing cycle was nearing an end.[9]
Two-year notes have yielded an average of 43 basis points, or 0.43 percentage point, more than the Fed's rate the past 20 years.[4] The two-year note yield rose 5 basis points to 2.18 percent as of 8:15 a.m. in London, according to bond broker BGCantor Market Data.[3] The yield on the 10 year note climbed 2 basis points to 3.72 percent and the yield on the 30 year bond moved 2 basis points higher to 4.51 percent.[13]
Two-year note yields climbed even more, increasing 39 basis points to 2.13 percent.[4]
A basis point is 0.01 percentage point. The two-year rate will rise to 2.25 percent this week, Johnson said. The MSCI Asia Pacific index of regional shares climbed 2.8 percent, its biggest gain in almost three weeks.[3]
Don't be surprised if the U.S. Federal Reserve stops cutting interest rates and joins our Reserve Bank in sitting on its hands for a while for similar reasons. Both will want to see how the impact of recent monetary policy moves will play out in the wider economy. Our central bank won't do anything at its board meeting next month after pouring over the March quarter Consumer Price Index this week.[8] Economic data on Thursday was mostly negative. The Conference Board said its March measure of leading indicators rose for the first time in five months, but the Labor Department reported a jump in unemployment claims last week by 17,000 to 372,000, and the Philadelphia Federal Reserve said the region's manufacturing contracted at a faster pace in April than it did in March.[14]
The series of interest rate cuts by the Federal Reserve don't affect fixed-rate mortgages because long-term rates are sensitive to broad economic trends.[15] On the ECB front, several ECB governing council members continued to warn on the upside inflation risks and indicated that a rate hike could not be excluded if inflation risks materialize. As such, the ECB stepped up its inflation-fighting mantra. All interest rate cut expectations for this year have been wiped out.[11]
Ten- and 30- year Treasuries "look awful generally,'' Brady added. Investors are gravitating toward five-year notes on speculation policy makers won't cut their target rate for lending between banks below 1.75 percent from 2.25 percent now.[4] Mortgage rates aren't likely to ease the rest of the year. The edgy credit markets are taking a toll, severing the link between yields on 10-year Treasuries, down a half point this year, and 30-year fixed rate home loans, which have dipped only a quarter point. Nervous investors flocking to Treasuries are trimming those yields, but equally nervous mortgage lenders aren't loosening their purse strings.[15]
The influence on short-term rates from the London market for dollar loans, concern that inflation may accelerate and "the Fed beating the drum on inflation rhetoric'' have fueled speculation the Fed will pause, said Carl Lantz, an interest- rate strategist in New York at Credit Suisse, one of the 20 primary dealers that trade with the central bank. Credit Suisse forecasts the Fed will lower its target for overnight loans between banks to 2 percent on April 30, Lantz said.[1] The central bank will start raising the rate from 1.75 percent in the first three months of 2009, according to the median estimate of 57 economists surveyed by Bloomberg News between April 2 and April 8.[4]
Philadelphia Fed President Charles Plosser said the central bank's short-term rate is already low enough to support growth.[2] Fed efforts to spur the economy, including six interest- rate cuts since September and tax rebates from the U.S. government planned for May, will spur growth later in 2008, said Minako Iida, a strategist for non-yen debt at Barclays Capital Japan Ltd. in Tokyo.[3] Together with Dallas Fed President Richard Fisher, Plosser voted against the Fed's 75-basis-point rate cut in March. Fisher restated his "strong reluctance" to make further rate cuts.[9] Philadelphia Fed President Charles Plosser warned against seeing rate cuts as "the solution to most, if not all, economic ills," and asserted that rates were now accommodative.[9] Fed funds futures reflected market expectations for a smaller, quarter-point rate cut.[9]
Libor is a global rate benchmark for consumer and corporate loans, while Eurodollar futures, Libor's exchange-traded counterpart, are the world's most traded financial contracts. With expectations of the Fed's rate-cutting campaign coming to end, this week's string of encouraging quarterly results across a range of industries soothed traders who had braced for dire earnings news that would have confirmed their recession fears, analysts said.[16]
A week ago, traders saw a 54 percent chance of a quarter-point cut, with the rest of the bets on a half-point cut, futures show. The Standard & Poor's 500 Index rallied 4.3 percent this week, the most since February, after Citigroup Inc.' s loss was less than the most pessimistic estimates and Google Inc. profits beat estimates, luring investors away from fixed-income securities.[1] "What we're seeing in Treasurys in particular is that flight-to-quality is moving into other securities," said Giddis said. With yields so low in Treasurys, investors are moving money into higher-yielding safe assets, he said -- including gold and highly-rated mortgage-backed securities. "It's not a big step-up in credit risk, but it's a big pick-up in yield," Giddis said.[14] NEW YORK (AP) -- Treasury prices fell slightly Thursday, with investors hopeful the credit crisis is largely over but uncertain about the prospects for the U.S. economy.[14] U.S. bond prices fell slightly Thursday with investors hopeful the credit crisis is waning, but indicators are mostly negative.[14]
U.S. stocks ended sharply higher Friday as a strong profit from Google sparked a rally in the technology sector and Citigroup gave investors hope that the credit crisis was nearing an end.[9]
Traders now see the Fed opting to make a quarter point rate-cut at month-end, rather than a steep half point cut, on signs suggesting the worst of the credit crisis has passed, lowering the risk of a U.S. recession.[16] "We've got some risks in the long end of the curve and two- years just look horrifically rich.'' Consumer prices in the U.S. rose 4 percent in March from a year ago, more than double their pace in August and close to a two-year high of 4.4 percent in November.[4] Two-year Treasuries fell the most in two weeks on April 15 after the Labor Department said producer prices increased 1.1 percent in March, almost double the median estimate in a Bloomberg survey, after a 0.3 percent jump the prior month.[1]
April 21 (Bloomberg) -- Treasuries fell, with two-year notes heading for their longest losing streak in 11 months, as Asian stocks rallied and the Bank of England prepared plans to revive the credit market.[3] The last time five-year Treasuries outpaced two-year notes on speculation the Fed would stop cutting rates was the second quarter of 2003.[4] Two-year note yields reached the highest since January, surpassing the Fed's target for the overnight interbank lending rate for the first time since June 2006.[2]
"The five-year is really kind of the sweet spot,'' said Jason Brady, a managing director in Santa Fe, New Mexico, at Thornburg Investment Management, which oversees $4 billion in fixed income. Two-year notes will lag behind longer maturities as "Fed aggressiveness gets taken out,'' he said.[4]
Should investors become less concerned about inflation or more optimistic the economy will rebound, five-year notes have more to lose than longer maturities, said Robert Tipp, chief investment strategist for fixed income at Prudential Investment Management, which oversees about $200 billion of bonds.[4] Why? Investors in bonds will fret about higher inflation and push interest rates upward.[15]
Foreclosures will rise, housing starts will continue easing and bad debts on personal loans, car loans, etc will escalate. American investors haven't even wondered about the message the rising bond yield is sending them: they are too focused on a second half recovery and getting the benefit now. They are going to be horribly disappointed. They should look at the way banks are cutting tens of thousands of jobs and wonder why.[8] Bond investors can profit by betting on the relative value of yields between different maturities even when the market is falling.[4]
Demand for the notes will decline if the two-year yield falls to 2 percent and then again at 1.78 percent, Kevin Edgeley, a technical analyst at Goldman Sachs Group Inc. in London, wrote in a note to clients yesterday. These are so-called support levels, he wrote, at which bond sales may emerge, based on recent trading patterns.[3] Upcoming supply from monthly two- and five-year auctions also weighed on Treasuries a bit, said Ted Ake, head of bond trading at Mizuho Securities USA. The "rocket forward mode" of the stock market also hurt bonds, he said.[9] "Treasuries prices fell primarily because the stock market did better," said Gary Thayer, senior economist at Wachovia Securities in St. Louis.[9]
Supposedly,concerns about the effect of the higher price of oil have generated the European stock market losses.[13]
Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms.[5]
"The improved attitude in the equity markets, the idea that the bulk of adverse earnings surprises in the financials are behind us, and that the numbers outside financials are not that bad is not good news for the bond market," said Cary Leahey, economist at Decision Economics in New York. "It's the old story that when stocks do better, bonds do worse."[5] We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time.[12]
There's no sign of a prolonged spiral," said Howard Simons, a bond strategist at Bianco Research in Chicago. This less gloomy economic view triggered a sell-off in interest rate futures this week.[16] Mortgage rates also moved higher, making it more expensive to buy homes and less likely that existing homeowners will be able to refinance mortgages. Rates on 30-year fixed-rate mortgages rose to 5.87% from 5.63% a week ago and Jumbo mortgages, those of more than $US417,000, rose to 7.19% from 7.06%. Those with so-called ARMs (adjustable rate mortgages) face an unpleasant experience if their loans reset from this week onwards.[8] The sell-off in the U.S. Treasury market on the belief that the worst was over and risk was now coming back into favour, sent mortgage rates soaring.[8] The more Wall Street rebounds and the higher U.S. Treasury rates go, the higher mortgage rates will climb and the greater the pain in the housing sector.[8]
The 2-year note fell 7/32 to 99 11/32 and yielded 2.10, up from 1.99%. Another factor causing some investors to sell Treasurys is concern about the legitimacy of the Libor rate, the rate set by British banks, Spinello added. [14] The benchmark 10-year Treasury note fell 4/32 to 98 4/32 and yielded 3.73 percent, up from 3.71% late Wednesday, according to BGCantor Market Data.[14]
The 2- and 5-year auctions went poorly in March (and months before) and risks surrender the April auctions too. We expect the Treasury to up again the size of its auctions to respectively 30 and 20 billion $for 2- and 5-year Notes (up 2 billion $each).[11] The government may sell $20 billion of five-year notes the following day, which would be the most since 2003, according to Wrightson.[2] Five-year notes offer more protection than longer-maturity debt against inflation, which erodes the purchasing power of interest payments over time.[4]
"Treasuries, even at higher yields, offer limited value,'' said Scott Amero, global chief investment officer for fixed income in New York at BlackRock Inc., which manages $513 billion in debt.[1]
NEW YORK, April 18 (Reuters) - U.S. Eurodollar futures are poised for their biggest weekly loss in six years, as traders slashed bets on further interest rate-cuts from the Federal Reserve and amid concerns about the cost of interbank lending.[16] THERE HAS BEEN much talk in the media recently about the Federal Reserve and the actions it has taken over the past few months, writes U.S. Congressman Ron Paul. This interpretation of the Fed's actions couldn't be further from the truth.[6]
Normally that would not worry the Fed, but the U.S. and UK banking systems have become interdependent in the past five years of cheap money and the growth of London as the world's biggest forex market and the major trading centre for Europe.[8] Barclays, as one of the 20 primary dealers in the U.S., is authorized to trade directly with the Fed. The outlook for Treasuries through the end of June worsened last week, Ried, Thunberg & Co. said in its survey of fund managers. Its sentiment index fell to 46 from 49 the week before.[3] Wall Street, coming off the Dow's best week in two months, appeared headed for steady start even after second-largest U.S. bank Bank of America said first-quarter profit fell, hurt by write-downs and rising credit losses.[5] Against that background, UK home prices dropped in April and the Bloomberg story employed a nice verb noting that the dysfunctional credit markets had '''starved''' the markets of mortgage credit. Bank of America reported its Q1 results and they were not pretty as earnings dropped 77 percent on writedowns and credit losses.[13] Overnight, the Rightmove house price index confirmed that it is going from bad to worse in the UK housing market, as the annual house price inflation slowed from 5% to 1.3% in April, the lowest level since July 2005. Today, the Bank of England may unveil all details of its plan to help the mortgage market.[11]
The Bank of England will expand the types of securities it is willing to use in repos and other funding deals with the banks: it is funding the banks to the tune of billions of dollars a day like the Fed and now the big price is to be paid by the banks and existing shareholders.[8] The answer is easy: because the business (especially in mortgages, in fixed income and in selling securities to big investors and securitising loans) isn't there now and won't be for another year or more. The banks are preparing their businesses for a slow to sluggish two to three years. It's happening in the U.S. and it is happening in London.[8]
In a potential sign of renewed financial market pressures, the three-month London Interbank Offered Rate jumped from 2.73% on April 16 to 2.91% on Thursday as British banks tremble at a imploding mortgage market, rising bad debts and the unsettling experience of the failure and nationalisation of Northern Rock.[8] Yields on two-year notes also rose as the rate to borrow dollars in the London interbank market surged the most since August in response to a threat by the British Bankers' Association to ban members that deliberately understate borrowing costs.[2] The gap between three-month Treasury bill yields and the three-month London interbank offered rate, the so-called TED spread, shows corporate borrowing costs have yet to return to levels before the credit crisis escalated in August.[3]
Longer maturities clawed back from losses spurred by a flight to equities from safe-have bonds. The benchmark 10-year Treasury bond traded at 98.08, with its yield (TNX) ending at 3.711%, or nearly flat with Thursday's late trading.[10] Prices of Treasury coupon securities have registered mixed results in overseas trading.[13]
"As the market starts to focus on the notion that we're past the worst. there's increasing talk of Treasurys being a very overvalued asset," said Joel Marver, a Treasury technical analyst at Thomson Financial. He said there remain some worries about the credit markets, which continue to prop up the market to a certain extent, but "it looks to me that prices are going to go lower."[14] Despite the downbeat outlook for the economy, however, there have been a number of factors weighing lately on Treasurys, which are normally popular assets in times of economic turmoil. One is the feeling that the worst of the tightness in the credit markets has past.[14]
Because Treasury yields have fallen so hard over the past several months, investors are looking to different types of safe-haven assets, said Kevin Giddis, managing director of fixed income at Morgan Keegan.[14] "Those trades are being unwound because there was a perception that the yield curve and swap curve would continue to steepen," said Thomas di Galoma, head of U.S. Treasurys at Jefferies & Co. "That's come to an end, because Libor has been steepening."[10] Notable was the two-year Treasury note yield's rise - albeit short-lived - above 2.25% on Friday, up from 2.11% late Thursday.[9]
The narrowing of the spread in recent weeks shows that five-year Treasuries have held up better than two-year notes in the sell-off the past month.[4] Two-year debt also fell before a government auction next week that may be the biggest on record for the maturity.[2] The huge RBS bank (Royal Bank of Scotland) is due to reveal the terms of a mooted rights issue that could be the biggest in history at around $US20 billion. It will be done at a big discount to the share price last week and it could come with some sort of commitment from the CEO, Sir Fred Goodwin, for change at the top, including his role.[8] Citigroup, the biggest U.S. bank by assets, reported a first-quarter net loss of $5.11 billion, less than analysts' most pessimistic estimates.[2]
Bond buyers will also pay more attention to the fiscal stimulus passed by Congress, which will help boost the federal budget deficit to around $500 billion.[15]
Looking at the way bond prices have risen dropped as yields across the curve has risen, that's a solid tip.[8]
The price of the 1 3/4 percent security due March 2010 fell 1/16 today, or 63 cents per $1,000 face amount, to 99 8/32.[2] The Libor rate for dollars climbed 9 basis points to 2.91 percent, the BBA said today.[2] The London interbank offered rate for dollars climbed 9 basis points to 2.91 percent, the BBA said.[1]
In EMU, the rebound occurred largely after the official closure, leaving yields up 14 basis points at the 2-year, over 6 basis points at the 10-year to 3 basis points at the 30-year sector.[11]
At some point, the Fed, absent hyperinflation, will simply run out of money and/or Treasuries. We already know the answer to this. It lies in the record high gasoline prices, record high food prices, and either record or near-record prices in almost everything else. [12] Minutes of the Fed's March 18 policy meeting signaled officials will slow the pace of interest-rate cuts.[4] The Fed sees the rise in yields as signalling increased market confidence in U.S. economic prospects.[8] "We expect some improvement in the U.S. economy.'' Ten-year yields will climb to 4.10 percent by year-end, she said.[3]
Faster inflation tends to widen the difference in yields between short- and longer-maturity debt. [4] The monetary base is growing at a record pace: over 17% y/y as of last week. That growth in turn will fuel consumer price inflation moving forward at an ever-accelerating rate regardless of what the irrelevant CPI states.[12]
With reports circulating that an investigation into the banks' rate quotes could result in a sharp rise, investors are unsure about the value of various fixed-income assets right now.[14] Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.[11] You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.[11]
In that regard, the Bank of England announced a facility to ease the bank to bank lending problems in the UK as it agreed to a plan similar to one hatched by the Federal Reserve. [13] Eurodollar futures were also sideswiped by increased scrutiny of the rates banks provide to generate each daily fixing of London interbank offered rate (Libor), analysts said on Friday.[16]
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. [2] 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.[9]
SOURCES
1. Bloomberg.com: U.S.
2. Bloomberg.com: Worldwide
3. Bloomberg.com: U.S.
4. Bloomberg.com: U.S.
5. TREASURIES-Prices slip as hopes for big rate cut fade | Reuters
6. Bail Out Bonanza | Gold News
7. Free Preview - WSJ.com
8. LIVENEWS.com.au > Business > Keep an eye on US rates
9. Investor's Business Daily: Shift From Safe-Haven Bonds To Stocks Trims Treasuries; Smaller Rate Cut Seen
10. BOND REPORT: Treasurys Suffer On Equity Bounce, Libor Spike
11. Global bonds made a roller-coaster ride
12. Federal Reserve Notes Backed by Worthless Mortgage Bonds- Who Will Bail Out the Fed? :: The Market Oracle :: Financial Markets Forecasting & Analysis Free Website
13. Bond Expert: Monday Outlook - Seeking Alpha
14. Treasury prices slip despite mostly negative economic data. - Apr. 17, 2008
15. Mortgage Rates at the Low Point - Kiplinger.com
16. Eurodollar futures post biggest weekly fall in 6 yrs | Markets | Bonds News | Reuters
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