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U.S. Treasury Bond Market Update

Interest-Rates / US Bonds May 01, 2010 - 07:46 AM GMT

By: Levente_Mady

Interest-Rates

Best Financial Markets Analysis ArticleThat darned bond market just won’t give up the ghost!  So much to write about this week in so little space!  Another record amount of supply (close to $130 Billion) was auctioned without a hiccup last week.  The bond auctions were overshadowed by the FOMC meeting and some further supportive data on the fundamental front.


To nobody’s surprise the Fed has kept its overnight benchmark interest rate unchanged at practically ZERO% at its Open Market Committee Meeting scheduled last Wednesday.  They also reiterated the promise to keep rates ultra low for an extended period of time.  I believe that should keep us at close to ZERO rates heading into 2011.  As pointed out here in previous editions, long bonds with 4.5+% yields remain dirt cheap; the carry trade remains the odds on favourite for easy profits.  The Bank of Japan also reiterated its commitment to the Zero Interest Rate Policy it has been sticking to for the better part of a decade and a half now.

The FDIC closed down 7 banks last week and another 3 this week, bringing the running total to 60 for 2010.  Some financials may be doing well with the steep curve but have you looked at a Goldman Sachs chart lately?

NOTEWORTHY:  The economic calendar was light.  The Conference Board and the University of Michigan Consumer Indexes both ticked up 5 points but remain at depressed levels.  Interestingly the Weekly ABC Consumer Comfort Index continues to be stuck in the mud at -49 on the latest reading.  Weekly Initial Jobless Claims dropped from 459k to 448k – in line with expectations - last week.  The advance GDP report indicated that the US economy grew at a slightly lower than expected 3.2% during the first quarter of 2010.  The inflation component (the Chain Deflator) of the GDP report was also lower than expected at 0.9%, leaving the nominal growth at a below trend 4.1%.  I guess a $1.5 Trillion budget deficit that had an $800 Billion stimulus package built into it just does not go very far these days.  We are not going to dwell on facts like inventory building was the strongest contributor to growth, but we are looking for further slowdown in both the real and the nominal GDP data going forward.  Unless of course the government decides to drastically stimulate the economy further by allowing the deficit to balloon well past $2 Trillion next year. 

We know that the Bernanke Fed has no plans whatsoever to take its foot off the ZERO% interest rate gas pedal any time soon, so we should not be surprised if the Obama Administration will try to out-do them by throwing more money at the impending slowdown again.  The Employment Cost Index increased 0.6% in Q1, taking the annual figure up 0.2 to 1.7%.  In Canada, GDP grew in line with expectations of 0.3% in February.  Again, the numbers were boosted by the Olympics related activities and will be hard pressed to be sustained.  Certainly the Canadian Dollar sold off on the lack of the upside surprise.  This week’s economic schedule will be highlighted by the Monthly Employment report along with the ISM Surveys, Personal Income and Spending as well as the Consumer Credit report.

INFLUENCES:  Trader sentiment surveys we watch on a weekly basis moved in opposite directions with a net effect of no change last week.  On a scale of 0-10, the surveys I follow are slightly above 5.0, which is not much help.  An interesting headline I came across from last week’s Barron semi-annual Big Money Poll tells us that 78% of the participating investment managers were bearish on bonds (i.e. looking for rising yields) while a slightly underwhelming 1% were bullish (looking for declining yields).  I suppose the other 21% must have been neutral.  That folks has got to be some sort of record of bear/bull ratio at 78X.  I don’t think I will be recommending shorting bonds for a while based on that boat leaning ever so slightly (tilting maybe?) one way…  The Commitment of Traders report showed that Commercial traders were net long 409k 10 year Treasury Note futures equivalents – a decrease of another 135k on the week.  This metric is still supportive, but has dropped significantly from the record highs of a couple of weeks ago.  Seasonal influences are negative through May.  The technical picture remains neutral as the Long Bond continues to aimlessly chop sideways.

The 10 year Treasury Note yield has been stuck in a narrow trading range between 3.5-4.0% since December.  Until we see a solid breakout, the market is telling us that it wants to drift sideways.  We are sticking with our neutral view until there is compelling evidence to change.  We are getting close to the top of the price range (low end of yields) and with the long commercial positions having been cut almost in half, I don’t reckon the bonds will be running away here unless the stock market blows up real good!

RATES:  The US Long Bond future was up over 2 points to 119-02, while the yield on the US 10-year note decreased 15 basis points to 3.66% last week.  The Canadian 10 year yield decreased 5 basis points to 3.65%.  The Canada-US 10 year spread narrowed 10 bps as the Canadian 10 Year yield was a measly 1 basis point below the US 10 Year Treasury yield.  The US yield curve was 5 basis points flatter with the difference between the 2 year and 10 year Treasury yield now at 269.

BOTTOM LINE:  Bond yields were lower across most maturities last week, while the yield curve tilted slightly flatter.  The fundamental backdrop remains supportive.  Trader sentiment is neutral; support provided by the Commitment of Traders data is positive while seasonal influences are negative.  Based on this info, we are stuck in neutral mode.  If you were way long, move closer to neutral but keep a bullish bias and earn the carry!

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.

© 2010 Levente Mady, All Rights Reserved

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