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Posts Tagged ‘Treasury supply’

October 24, 2009: Month to Date Market Review

Posted by Larry Doyle on October 24th, 2009 7:32 AM |

Did the market merely take a breather this week or is the ‘little engine that could’ getting tired? Are we distinguishing the winners from the laggards? Are the cracks in our economic foundation repairing or are some just too large to hold back the flow of red ink, i.e. embedded losses? Perhaps we are experiencing all of the above as we continue our journey along the new and varied trails of our economy. Let’s review the major economic statistics for the week, along with the month to date returns across a wide array of market segments.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents. If you have any questions, please do not hesitate to ask.

ECONOMIC DATA

I largely discount positive news on the housing front as I view them largely manipulated by Uncle Sam while delinquencies, defaults, and foreclosures move ever higher. This may be an oversight on my part, but so be it.

Aside from that, I believe the most meaningful news this week was the GDP report from the UK. Please see my Friday morning commentary highlighting how the UK remains mired in recession.

Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 92.08 versus 89.68, +2.7%
Euro/Dollar: 1.500 versus 1.4635, +2.5%
U.S. Dollar Index: 75.44 versus 76.72, -1.7%

Commentary: the overall U.S. Dollar Index declined marginally this week. The dollar has improved versus the Japanese yen, but remains decidedly weak versus the Euro. The U.S. Dollar Index did break below 75.00 at one point early Friday. The correlation between the U.S. Dollar Index and the equity markets remains quite high. Both markets ended the week close to unchanged. Have too many people bought equities and commodities while having sold the U.S. greenback? I have been asking that question for the last month so no reason to stop now. The biggest impact of the weak dollar is seen in the commodity markets and long term interest rates. Commodities continue to trade with a firm tone while interest rates move higher.

I reiterate my comment from previous weeks: while I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. On this topic, please read “Brazil Wants A ‘Real’ity Check.”

COMMODITIES

Oil: $79.65/barrel versus $70.39, +13.1% REMAINS VERY FIRM
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 137.32 versus 127.683, +7.5%

Commentary: I repeat from last week, unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index once again moved higher and got back above the 3000 level. Is the improvement in the non-Japan Asian economic bloc for real? Certainly the economies in Europe and North American remain decidedly challenged.

I continue to believe these commodity tea leaves are an indication of inflationary expectations in these ‘inputs,’ while we encounter deflationary pressures in wages and real estate. (more…)

Treasury Supply Surprises Market

Posted by Larry Doyle on June 18th, 2009 1:34 PM |

Wall Street as an industry hates surprises. Whether it is expected earnings, economic data, or government information, Wall Street much prefers getting a sneak peek, positioning itself accordingly, and then profiting when news is actually released.

Well, Wall Street was surprised today with the release of the sizes of next week’s 2yr, 5yr, and 7yr Treasury auctions. The street expected the same sized auctions as May: $40 billion 2yr, $35 billion 5yr, $26 billion 7yr.

Bloomberg reports, Treasuries Fall as Reports Point to Growth, Debt Sales to Rise:

The Treasury will auction $40 billion in two-year notes on June 23, $37 billion of five-year debt the following day, and $27 billion of seven-year securities on June 25, the department said today. The total is $3 billion more than when the government last sold notes of similar maturities and the most since the U.S. began sales of this combination of maturities in February.

One may think that only $3 billion more than expected should not be a big deal. Well, not unlike a company missing earnings by .01 and having the stock plummet, the change in the size of these auctions is a lot more significant than merely $3 billion Treasury notes.

The larger auctions are an indication that tax revenues are less than expected, while spending is greater than expected. Additionally, if this round of auctions are larger than expected, Wall Street will ratchet up the expected sizes of future auctions as well.

How is the market responding?

Interest rates have backed up by 10-15 basis points across the curve. The 10yr note is back up to a 3.83% putting it once again near that 4% level. In my opinion, it is only a matter of time when the Treasury market breeches that level and stays above it regardless of what happens in the economy or equity market. Additionally, I expect mortgage rates will move above 6% and stay above that level as well.

Barack’s bond bus is working very hard to stay on the road, but as the government bond bubble is bursting under the weight of all this supply, the economy will have to work ever harder to regain its footing.

LD

Is The Government Bond Bubble Getting Ready To Burst?

Posted by Larry Doyle on April 30th, 2009 5:45 AM |

The equity markets have rebounded significantly over the last seven weeks. The Dow and S&P are now down approximately 4-6% on the year. The tech heavy Nasdaq has distinguished itself and is up approximately 10% on the year.

At this juncture, if the equity markets are implying that the economy will not slip into Depression, then the bill for the stability in equities is being transferred to participants in the bond market. Government bonds are facing an almost weekly avalanche of tremendous supply. This week the market is absorbing over $100 billion in 2yr, 5yr, and 7yr Treasury securites. Take a deep breath and next week the market is faced with over $75 billion in 3yr, 10yr, and 30yr government securities. The Treasury is likely going to sell 30yr government debt on a monthly basis!! 

The Federal Reserve has been the biggest buyer of Treasury and mortgage-backed securities. The Fed’s balance sheet may be large but it is not endless. What have 10 yr. Treasury securities done on the year? Even in the face of massive buying of these securities by the Fed, the 10yr has backed up almost 1% to a current level of 3.1%. That rise in rates is very significant. 

I have maintained and continue to maintain that interest rates will move higher given the overwhelming demand for funds by global governments to pay for deficit spending. Central banks around the world may try to hold the respective bond markets up and interest rates down but investors will continue to demand a higher rate of interest in the process. 

As government rates move higher, mortgage rates, and other corporate rates will likely move higher as well. If we get a whiff of early signs of inflation which I believe is coming these rates could ratchet higher and the bubble in the government market would not merely burst but would actually explode.

LD






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