TALK FROM TRENCHES: SETTING UP PRE-GREENSPAN; WHERE'S JAPAN'S DLRS?
13:01 EDT 07/21
By Isobel Kennedy, Rob Ramos, Joe Plocek
NBEW YORK (MktNews) - U.S. Treasuries are still biding their time until Mr. Greenspan's testimony Thursday. Sources say much of the underlying market firmness, especially in the short end, is due to events in the international markets.
U.S. Treasuries are trading in a tight range amid sporadic and choppy flows as players clean up their books for Greenspan. Speculative accounts, who had been short, appear to have covered most of those positions. The Street seems to be slightly long with holdings weighted in the short to intermediate sectors. Customer accounts, mostly short duration, are only seen chasing the market higher on "very dovish" comments.
Net net, most players are neutral or close to home, sources say. Some strategists contend that if Greenspan's comments are neutral, the market could witness a pullback. Some are looking for the long end to drop at least one point and the 2/30Y curve to flatten to about +43 from its current level of +50. They say the market is at the high end of the recent range and is technically overbought.
Earlier Monday, the market received a lift when China was downgraded by S&P from BBB+ to BBB. The agency cited lower growth and the cost of reform for the move. Actions such as these keep the talk of a yuan devaluation alive. Players say the downgrade was unexpected and caused the spread on Asian sovereign bonds to widen by 10 to 20 bps.
The Bank of Japan was in buying dollars again last night. Japan's Finance Minister Kiichi Miyazawa restated there is a need to counter a premature strengthening of the yen and to ensure an economic recovery. He told a news conference the yen's recent advance "will be a drag on the economy" and that monetary authorities must "preempt this."
He also said it is too early to seek a hike in the official discount rate, now at 0.5%. Asked about the possibility of a supplementary budget, Miyazawa repeated his view that the government will make a judgment after Q2 GDP in September. By the way, Japan will sell another ten-year bond tomorrow.
The markets are still puzzled about what Japan is doing with all those intervention dollars. Intervention is being estimated at $30 billion since early June. But Federal Reserve data show foreign custody holdings are down and foreign add-ons at T-bill sales are only +$5.3b. Dealer repo transactions were up more than $50b in June, so are the Japanese "going private" and not asking the NY Fed to arrange their transactions?
An article in the Washington Post Wednesday morning shed little light about the thinking of the FOMC. But analysts were interested in the portion of the article which indicates that looking ahead, Greenspan, Hoenig, Boehne, Broaddus, McTeer, and a number of other officials believe the U.S. economy is now capable of expanding at a 3% rate without making inflation worse. Reportedly, some of them, including the chairman, think the number may well be higher. Broaddus was quoted as saying, "It may be that 3.25% rate is on the low side."
Corporate supply continues to grow and players expect that it will put pressure on Treasuries at times due to rate locking and hedging. But it will also give the market a bid on when these are unwound.
In addition to the huge supply of corporates ready to swamp the market, Treasury will announce the details of next week's two-year sale. Opening forward roll on the issue is close to even, analysts say. Calculation: curve worth about .7, repo estimated at 4.25%, carry seen at 1.5, liquidity worth 1, and adjustment for bad day at 1.5. Auction will be Aug 4 for 5-10-30.
Higher oil prices are finally hitting the pumps. U.S. self-service regular unleaded gasoline prices rose 3.2 cents to $1.174, per gallon in July vs. $1.142 per gallon in June, the American Automobile Association reported Tuesday. July's increase put the price of a gallon of regular unleaded gas at its highest level since late 1997 when the price was $1.216 per gallon.
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