Barkley Rosser
----- Original Message -----
From: "Gary Santos" <evs@xxxxxxxxxxxx>
To: <TheNewForum@xxxxxxxxxxxxxxx>; "EGroup PKT"
<pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, July 07, 2003 12:44 PM
Subject: Re: [TNF] Bubble Everywhere
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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