TALK FROM TRENCHES: US TSY STILL AILING; LISTING THE ILLS
By Isobel Kennedy, Rob Ramos and Kim Rellahan
NEW YORK (MktNews) - U.S. Treasuries are being beaten down across the curve Wednesday afternoon and prices are reaching new lows for the week. The market is still facing an uphill battle, sources say, with the negatives apparently carrying more weight than any positives.
Treasury salespeople were right when they said Wednesday morning that they suspected it would be another tough day to get any business done with retail. There are too many cross-currents muddying the waters today, including a slew of Fedspeak, earnings reports, the stock market and sister market supply.
The sentiment also remains bearish for the longer term, sources say. As was the case yesterday, the market is still sick from the negatives.
So just what are all these factors that are working against the market?
1) Fears of rate rises from the Federal Reserve, the European Central Bank and the Bank of England -- all at their respective November meetings
2) Inflation fears are mounting with the CRB and JOC indices moving on the upside. In addition to oil and gold price rises, coffee is also coming under price pressure due to floods in Mexico and the drought in Brazil
3) Retail sales and producer prices this week are much feared. Currently a 0.4% rise in the core PPI is priced into the market. But keep in mind, the consumer price index will be the next hurdle the following week.
4) Heavy sister market supply. Between today and tomorrow at least $10 billion in new corporates, globals, eurobonds and agencies will be sold
5) Agency paper is stealing customer interest. For weeks now, the only buy-interest from real money here and abroad has been in agency paper
6) U.S. domestic retail is not buying the Treasury market
7) Despite frequent setbacks, stocks are bouncing back repeatedly and continue to burn those who are playing the equity/treasury game
But doesn't the Treasury market have anything going for it, some players ask? Here's a few:
1) Stocks have been on a downtrend since the Dow Jones peaked in August at 11,300
2) The dollar has stabilized after its deep drop against the yen
3) Possible Y2K disruptions are still real concerns
4) The next tightening could mark the last in this cycle
5) Treasury supply continues to dwindle
6) 1999 is being labeled as one of worst bear markets in recent history and that provides a buying opportunity especially for those who believe inflation fears are overblown
7) Retail accounts are short their durations and will have to extend at some point
The only other focus in the market today is Japan -- of course! The Bank of Japan left rates unchanged today but did say they would start buying government bill from the market. And it will add two-year government securities to its repo operations.
The details of the principle terms and conditions of such operations will be discussed at the Oct 27 monetary meeting. And needless to say they stressed that this policy does not mean a further easing of its monetary stance.
By the way, U.S. Fed Governor Meyer, in a speech last night, raised doubts that more BOJ easing would be helpful. He said Japanese fiscal measures would be more useful.
Japan's EPA Sakaiya, of course, reportedly lauded the BOJ's decision saying they took a "bold step" and that the decision "clears a path" toward recovery.
But BOJ Governor Hayami does not seem so sure. It was reported that he still can't see a sustained recovery and that the BOJ has to closely watch the impact of the yen on corporate profits.
And for those, including U.S. Fed Greenspan, who think that more easing is not the answer to Japan's problems, an article in Wednesday's Financial Times brings up an interesting point.
It says that the BOJ's injection of Y1,000 billion per day goes unwanted to the extent of approximately Y300 billion. The money brokers, or tanshi as they are called, who transport the money from the BOJ to the commercial banks have never seen anything like this before. They can't give the money away and end up losing money themselves by holding the excess funds overnight with the BOJ earning "nothing." The tanshi brokers say the banks are "on strike" and the banks' corporate customers are continuing to cut investments. Tanshi brokers say that the BOJ is not blind, they see idle funds come back to them every day as the brokers scramble to avoid losing money.
So as Mr. Greenspan said in late October, "In dire circumstances, modern central banks have provided liquidity, but fear is not always assuaged by cash. Even with increased liquidity, banks do not lend in unstable periods." And, it appears, there is too much fear to borrow as well, even at zero interest rates.
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury trading rooms offered as a gauge of the mood in the financial markets. It is not hard, verified news.
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