it appears others are figuring out my DBRSY leading the long bond higher in yield indicator (aussie buck leads most commodities -except gold of course which nobody wants -s-):
Rate of Return
Sun, 01 Aug 1999, 10:26am EDT
Need Advice on Treasury Bonds? Look Down Under: Rates (Repeat)
By Perri Colley McKinney
Need Advice on Treasury Bonds? Look Down Under: Rates (Repeat)
(Repeating to fix typographical error.)
New York, July 30 (Bloomberg) -- David Mozina says investors
who want to know where Treasury bonds are headed should watch
what's happening to a currency half a world away -- in Australia.
If the strategist at Merrill Lynch & Co. is right, U.S.
bonds are poised to fall.
Mozina, a native of Australia, is telling clients the
currency and U.S. 10-year yields have run a parallel course 79
percent of the time since 1990. What's more, his research shows
the Australian dollar leads Treasuries by three to six months,
which gives investors plenty of time to plot their next move.
''It's one of the better indicators for Treasuries,'' Mozina
said. ''If you believe the Aussie dollar is on a strengthening
path, it's hard to get too aggressive on Treasuries.''
The Australian dollar has rallied 7 percent against the U.S.
currency so far this year, reflecting expectations stronger
global growth will boost prices for the commodities it exports.
Higher commodity prices fuel inflation, which in turn drives U.S.
bond yields higher.
Australia's trade relationship with emerging-market
economies also makes its currency a gauge of the risk global
investors will tolerate. The more risk they'll take, the less
they need the safety of U.S. government securities.
Trouble Ahead
With U.S. yields climbing, investors who bought 10-year
notes at the start of the year have lost 6 percent, including
price moves and reinvested interest payments. And if Mozina is
right, they could be set for another round of declines as the
Aussie dollar (say ''ozzie'') extends its gains, as many in the
market expect.
It rose to 65.31 U.S. cents today from 66.46 late yesterday.
Ten-year yields rose 6 basis points to 5.93 percent.
This far-away currency is by no means alone in signaling
more Treasury losses. Traditional economic indicators, including
employment cost and labor statistics Federal Reserve Chairman
Alan Greenspan recently emphasized, point the same way.
Next week's employment report will contain some important
clues. U.S. unemployment in June probably held near its lowest in
three decades, at 4.3 percent, while earnings rose 0.3 percent
from 0.4 percent in May, according to a Bloomberg survey.
Mozina also uses domestic measures to predict Treasury
yields, though he relies on the Aussie dollar to tell him the
timing and direction of moves. He compares start-of-the-month
prices since 1990 for the dollar and 10-year Treasuries, which
showed a 79 percent correlation in analysis.
The 28-year-old then applies the theory of Granger
causality, a method of establishing leading economic indicators
that he learned as a honors student at Melbourne University. It
proves the currency moves well before the bonds -- rather than
changing directions simultaneously with the ebb and flow of
global growth.
Follow the Leader
Take, for example, the dollar's 17 percent advance since
last August. It sank to 55.3 U.S. cents on August 28 and then
changed course, shooting up to a 13-month high of 67.47 U.S.
cents on April 11. U.S. yields began climbing in earnest at the
beginning of the year -- lagging the currency by about one
quarter.
''When the Aussie turns, it leads Treasuries,'' Mozina said.
''It bottomed out in third quarter and yields bottomed out in the
fourth.''
The same connection doesn't exist between commodity prices
and Treasuries directly. Even as world economies are recovering
and yields are rising, the benchmark Bridge-Commodity Research
Bureau index isn't far off a 24-year low.
''Commodities are becoming an archaic representative of
global growth,'' said Tim Fox, chief economist at currency
strategist at Standard Chartered Bank. ''You might think the
Australian currency is a commodity-based currency, but it's not
solely.'' |
