Re: [TNF] Bubble Everywhere

["Gary Santos" <evs@xxxxxxxxxxxx>]

The article below supplements what Henry just posted. I continue to wonder
if Bernanke is stepping in to hold up the bond market. Even as I write I am
surprised that the rally in the stock market world wide continues. Is the
liquidity coming from the bond market? The rally in the stock market is a
bet on the theory that inflation will increase real asset prices and as
liquidity is created from bond liquidation, more so if the Fed is supporting
the bond market at these lofty prices, the rally in the market will
continue. Nick, do you have yields on the 10-year note going back several
years? It would be great if you could post them in chart form.

Money has nowhere of real substance to go to but the choice of the moment
are stock market bets. I would think money will eventually turn to the
currency markets and another wild ride will develop. I think this is what
Henry means when he said that all markets are now trading markets. Money
will flow from one market to another. I would think that gold will benefit
as a consequence.

Any opinions out there?

Gary Santos



US Treasuries hammered for second day, Fed faulted
Thursday June 26, 4:37 pm ET
By Wayne Cole

http://biz.yahoo.com/rf/030626/markets_bonds_6.html
(Adds late prices, comment)
NEW YORK, June 26 (Reuters) - Treasuries were hammered again on Thursday as
a massive corporate offering from GM tempted away investors still smarting
from what they saw as the Federal Reserve's half-hearted easing in monetary
policy.

The benchmark 10-year note shed over a point in price for a second day
running while yields shot to six-week highs above 3.50 percent.

Yields have risen over 30 basis points since the Fed delivered its quarter
percentage point cut in interest rates, so undoing much of the recent easing
in financial conditions.

Meanwhile, such was the deluge of demand for General Motors Corp.'s
(NYSE:GM - News) bond issue that it was repeatedly raised in size until it
totaled $17 billion, making it the largest corporate bond sale in history.
As a result, investors dumped Treasuries both to make room for the
higher-yielding paper and to hedge against adverse movements in yields on
the deal.

"It's been another wild day," said J.P. Marra, managing director of
government bond trading at Lehman Brothers. "The GM deal was a big part of
the down-move today. It's such a lot of paper and, what with investors being
upset with the Fed, it's been a double whammy."

The market took further umbrage when minutes of the Fed's previous meeting
in May showed members played down the risk of deflation, so pushing out any
chance of it adopting unconventional measures such as buying longer-date
Treasuries.

Marra feared further pain for bonds in the short term, but also felt yields
were nearing levels that would be attractive to many longer-term players.

"The Fed disappointed a lot of people but at least it looks like keeping
rates around 1.0 percent for a long time to come. Now with the five-year
nearing 2.5 percent, it's starting to offer a compelling carry for
investors," said Marra.

The five-year note (US5YT=RR) lost a hefty 19/32 in price on Thursday, so
forcing its yield to 2.45 percent from 2.32 percent on Thursday and a recent
record low near 2.00 percent.

The carnage was widespread, with the two-year yield (US2YT=RR) leaping to
1.40 percent from 1.29 percent and a trough of just 1.09 percent on
Wednesday.

The 10-year note (US10YT=RR) sank a full point in price for a yield of 3.53
percent from 3.41 percent. The 30-year bond (US30YT=RR) collapsed 1-18/32,
taking its yield to 4.56 from 4.46 percent.

MISUNDERSTOOD, AGAIN

The spike in yields will likely see mortgage rates rise and could crimp the
rush of refinancing that has been supporting consumer incomes. It can also
become self-feeding since holders of mortgage debt will have less reason to
hedge against prepayment and may sell some of their Treasuries, so forcing
yields yet higher.

That is an outcome analysts assume the Fed would want to avoid and there was
talk in the market that officials were perturbed by the jump in yields.

"Apparently the Fed thinks it's been 'misunderstood' again," said one trader
at a primary dealer. "Well, if they just said what they mean instead of
obscuring it in central bank speak, we wouldn't have these problems."

He suspected Fed board members would soon be offering calming words to the
market, trying to pull yields back down, and noted Chairman Alan Greenspan
would have a perfect opportunity to clarify their policy when he testifies
to the House in mid-July.

Meantime, the market would be extra-sensitive to the flow of economic data
fearing that any signs of strength will reduce the chance of further policy
moves, conventional or otherwise.

Thursday's numbers were too mixed to offer much of a guide. Weekly jobless
claims came in at a lower than expected 404,000, but first quarter gross
domestic product growth was revised down to 1.4 percent from an already
sluggish 1.9 percent.


http://bonds.yahoo.com/rates.html
U.S. Treasury Bonds
Maturity Yield Yesterday Last Week Last Month
3 Month 0.77 0.75 0.73 0.94
6 Month 0.90 0.88 0.89 0.96
2 Year 1.32 1.29 1.28 1.23
5 Year 2.55 2.48 2.40 2.26
10 Year 3.70 3.65 3.51 3.34
30 Year 4.72 4.68 4.55 4.39




----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: <pkt@xxxxxxxxxxxxxxxx>; <a-list@xxxxxxxxxxxxxxxxxxx>;
<TheNewForum@xxxxxxxxxxxxxxx>
Sent: Monday, July 07, 2003 11:48 PM
Subject: [TNF] Bubble Everywhere


> The burst of the equity bubble produced the bond bubble and the housing
> bubble. As investors fleed the stock market, funds poured into bonds,
> bidding up prices and lowering effective long-term interest rates.  As
> the Fed lowered Fed Funds rate targets, low mortgage payments pushed up
> housing prices, producing a housing bubble.  The burst of the bond
> bubble will threaten the housing bubble, the bursting of which will
> exacerbate aggregate demand in construction, for labor, for home
> appliances and supplies, which will in turn affect corporate earning
> which will torpedo the current "recovery".  The collapse of the Japanese
> bond market will also force the Japanese to sell US Treasuries, adding
> to the problem.  The smart money is already borrowing short term,
> through the repo market and its related instruments, to invest in
> 10-year treasuries. Another debt bubble is building.
>
> Bubbles are now pathological.  Fund managers are all forced to respond
> to quarterly results.  Herd behavior is a given. The aim is to beat the
> market, not to invest in the market. S&P Fixed Income Committee has just
> recommended a cut back of 5% on 10-year bonds in fixed income
> portfolios, in response to falling bond prices. The 10-year bond is now
> a terminal instrument in that the rate advantage in the currenct
> deflationary period is not expected to compensate to the price fall due
> to eventual inflation over its 10-year life span.  Thus 10-year bonds
> are now a short-term trading instrument, not a long-term investment
> instrument.  In fact, if you do not follow the market daily, you have no
> business being in the market.  So long to the long term investor.  When
> all investments are short-term, it is a trader's market, turning the
> economy into a horse race.  The difference is that in a horse race, the
> betting odds on a horse do not affect its performance. That is not true
> in an economy driven by equity and credit prices.  The whole market can
> bet on the wrong sector and make it a winner in the next quarter, but it
> may finish last in the race.
>
> Wealth preservation is now a losing game.  Asset is becoming a
> liability.  Income is all.
>
>
> Henry C.K. Liu
>
>
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