TALK FROM TRENCHES: BUYERS STRIKE; DO YIELDS HAVE TO CLIMB MORE?
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries are getting trashed for the third day in a row Thursday, and while conventional wisdom says there should be some buyers at these levels, customers are on strike. Not only are they not buying -- they are selling.
After retail sales showed a larger-than-expected rise in ex-auto sales, sellers came out of the woodwork on the way down. Oil money accounts were selling 5s and 10s, sources say, and swap accounts were selling 10s.
Central banks were selling 2s and 5s. These same accounts were selling short dated coupons and on-the-run 2s on Wednesday. What are the central banks doing with the money? They are buying agency paper, sources say, in the 2Y and 3Y area. They were said to be good buyers of this week's $5 billion Freddie Mac 3Y reference note.
A major West Coast money manager was rumored to be selling 5- and 10- year maturities for mortgage-related reasons this morning. Over the past few months the fund allegedly sold as many as 50,000 Dec T-bond strangles, which included short positions in the Dec T-bond 110 puts. Sources say although the fund manager is likely to take delivery on the contracts at that level, he may feel some pressure to lighten up his exposure.
Other domestic portfolio managers admit that Treasury yields look attractive but they say they are in no hurry to recommit to the market. And they won't pull the trigger until they see the "whites of the eyes" of the producer and consumer price reports.
One good thing about today's downdraft, players say, is that prices have now discounted a hefty PPI on Friday. But after this week's debacle does anyone know what discounted means?
Another word of caution -- watch out for corporate rate-lock selling on any upticks, sources say. And there are still professional accounts out there who are looking to set more shorts too.
Some are saying that it could be "dangerous to sell down here." Then again, others add that it has been dangerous to sell lots of levels this week but they still did it!
On the flip side, there are a few brave souls who said they were considering adding to long positions Thursday. Of course, they may not have put their money where their mouths were. They know the old "averaging down" strategy often causes a well-intentioned trader to get bounced out on his or her ear.
Averaging down has burned many a retail account too, salespeople say. That is why they think real money stays sidelined with cash rather than jump in, even at these new 1999 high yields. Portfolio managers would "rather feel assured and miss the first part of any extended rally instead of being forced to average down," one seasoned veteran adds. Remember, they too have bosses to answer to!
This week's deluge of cross product supply keeps the pressure on the market too. It began to feel like the underwriters were trying to get through the revolving door before it got slammed in their face, one source commented. In fact, that is probably what prompted British Telecom to price its $1B 5Y eurobond so early today. It came before 8:00 a.m. ET which is unusually early, players say. "Squeezing that deal in before retail sales today was a smart move."
But that may be coming to an end. Other than Freddie Mac's $5 billion 3Y reference note, not one other deal was upped in size this week and that is contrary to recent patterns. And today's $1B Asian Development 3Y global actually came wider than talk, and that too is unusual, sources say.
European bond traders are under as much pressure as their U.S. counterparts. In fact, interest rate fears caused German bunds to reach their highest yield since 1997 Thursday morning. One European bond trader said he felt like there was a sign on the credit market trading floors Thursday that said "Buyers Beware."
Another European trader said that E-11 weakness was most prevalent in the 5Y sector today. He says that definitely reflects the "fear factor" and that sparked the "fear factor trade" -- get out of stocks, get out of bonds and get into cash!
Speaking of stocks, they have obvious problems of their own even though the Dow Jones Industrial Average is up about 80 points right now. Traders are braced for about 100 companies to announce earnings at some time today. That could produce a lot of volatility couldn't it?
We are going to give everyone a break today and not mention one word about Japan or Asia. Instead, we would like to address what is going on closer to home in Washington, D.C.
Since the U.S. government managed to pull a surplus out of the hat -- and practically pushing the U.S. Treasury market out of business due to lack of supply, by the way -- the subject of politics does not come up in the capital markets much anymore. That is, of course, not since that silly little Clinton and Lewinsky impeachment thing, that is.
But Tony Crescenzi, Miller Tabak's market guru, brought up some very interesting Washington matters in his market commentary Thursday. With an election year looming, market players will probably want to start paying attention to a few of the following matters:
1) Clinton's defeat on the Nuclear Test Ban Treaty shows his early lame-duck status. Political uncertainty could keep downward pressure on the dollar and that could affect import prices and U.S. asset prices 2) New legislation on the Patient Bill of Rights will solidify the trend toward rising health care costs; 3) While the recent UAW pay raise accord is considered unusual, it is interesting to note that Republicans seem to be on verge of hiking the minimum wage; 4) The global upturn should lift producer costs through 2000 5) There is an historical correlation between the price of oil and wage demands.
Back to the market. Sources say sentiment remains outright lousy. A combination of ugly technicals, lackluster volume, and looming PPI and CPI reports has players looking to sell into any upticks. Inflation statistics will continue to dominate the market tone through year-end. Poor atmospherics, a market biased to look for bad news and momentum selling could cause Treasuries to deteriorate further. --Rob Ramos, Kim Rellahan, Alyce Andres contributed
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.
economeister.com
>>>Well, at least for the short-term, they seem to have
>>>priced in tomorrow's worst case PPI. |
