Economic Weakness Supportive of Bond Prices
Interest-Rates / US Bonds Apr 13, 2009 - 11:18 AM GMTBy: Levente_Mady
Before the start of this week’s column, I would like to make a quick announcement. I am not affiliated with MF Global any longer, so please note the new contact email below if you wish to reach me. The old email address and phone number that was published in previous editions is no longer functional.
The bond market continues to chop around aimlessly on mixed news. I should qualify that statement by pointing out that the fundamental news continues to be quite bleak but expectations are so dismal now that most of the news is close or even stronger than consensus expectations. Meanwhile the stock market is up about 30% from the lows a month ago, there is $50-100 in Treasury supply almost every week, but the bond market refuses to crack as it continues to trade below the line in the sand at 3% in the 10 year yield. Thus far the Bernanke put is holding the bond market together and I will continue to respect that.
On a side note, financials outperformed massively on the stock rally this past month. A number of stocks doubled or even tripled from their recent lows. Now comes the good news: it looks like the flood gates will open again and investors will have a once in a lifetime opportunity to buy billions and billions worth of additional stock at the recently inflated prices. It makes absolutely no sense! If the market is turning around and financials are in such great shape, why do they need to raise capital AGAIN? The recent relaxation of the mark-to-market accounting rules perpetuates further obfuscation of the real worth of these companies and encourages the same irresponsible business practices that got us in this mess in the first place. And finally, how come all those smart investors were not lining up for new issues when CitiGroup was trading below $1, but a month later they are breaking down the doors the buy the same garbage closer to $3.50?
NOTEWORTHY: The economic data was mixed again last couple of weeks. The ISM Purchasing Manager Surveys are stuck in the mud at clearly recessionary levels as the manufacturing survey was unchanged at 36 while services survey drifted down a couple of points to 40. This leading indicator is telling us that both sectors are in a recession for the foreseeable future with no turnaround in sight. The monthly Employment report was every bit as lousy as the past half dozen, with another 700k+ jobs lost (including revisions) and the official Unemployment Rate jumping to 8.5% it’s highest reading in decades. Consumer Credit declined $7.5Billion in February. This number is somewhat misleading as the January figure was revised up by $6Billion; leaving the net change at a drop of just over $1Billion for the first two months of 2009. Consumer Credit declined 5 out of the past 7 months and the year over year figure is at 1% and dropping rapidly. Weekly Initial Jobless Claims drifted down 20k to 654k, while Continued Benefits continue to skyrocket and are now only a few weeks from hitting 6 million.
The US Trade Deficit imploded another $10Billion+ in February to $26Billion. At this rate the US will be looking at a Trade Surplus before the end of 2009! Who would’ve thunk??? Anyways, imports continue to collapse as expected – only way faster than consensus –, dropping another $8Billion, while exports showed a surprising jump of $2Billion. Surely this is not good news for the exporting nations of the world. The Canadian economic data is not setting the world on fire either.
The Canadian Trade Balance jumped – barely – back in the black to record a surplus of $126Million in February after the $1.2Billion deficit in January. It is most likely that the Canadian Trade Balance will be turning red again soon. The Canadian job data was rather ugly again. The Unemployment rate climbed to 8% as 61k jobs were lost in March. Unfortunately the full time job loss was even worse at 80k as the creation of 19k part time jobs cushioned the blow somewhat. Next week’s schedule will be busy and it will be highlighted by inflation reports (in the form of PPI and CPI), Retail Sales, Capacity Utilization and Industrial Production as well as some sentiment surveys and housing data.
INFLUENCES: Trader sentiment surveys remained stuck in neutral territory, but they ticked up slightly. The Commitment of Traders reports showed that Commercial traders were net long 324k 10 year Treasury Note futures equivalents – an increase of 61k from 3 weeks ago. This is slightly supportive. Seasonal influences are negative. The technical picture is neutral as the market managed to stabilize since the third week in January. I expect the 124 to 132 trading range to persist for the Long Bond futures. Boring as it sounds, until we bust through either side of this range with some conviction, I am happy sitting in neutral and trading the range.
RATES: The US Long Bond future faded two and a half points to 125-30, while the yield on the US 10-year note increased 15 basis points to 2.91% during the past 3 weeks. The Canadian 10 year yield was unchanged at 2.92%. The US yield curve was steeper as the difference between the 2 year and 10 year Treasury yield increased 13 basis points to 198.
BOTTOM LINE: Bond yields increased somewhat, while the yield curve was steeper the last 3 weeks. The fundamental backdrop remains weak, which is supportive for bonds. Trader sentiment is neutral; Commitment of Traders positions are supportive and seasonal influences are negative. My bond market view remains neutral.
By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Please carefully consider your financial condition prior to making any investments.
MF Global Canada Co. is a member of the Canadian Investor Protection Fund.
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