TALK FROM TRENCHES: WHERE DO WE GO FROM HERE? PROS AND CONS
By Isobel Kennedy
marketnews.com
NEW YORK (MktNews) - U.S. Treasuries have given back some of last Friday's gains
but are holding in reasonably well since last week's sharp rally. While lots of players are
nervous, it appears that many of them prefer to err on the side of being involved for a
variety of reasons, sources say.
Some of the positives are: 1) The market has done some tightening for the Fed and it
looks like it is having a slowing affect; 2) If the Fed tightens again, the growing belief is it will
be the last of the series; 3) Ongoing inflation news is generally bond friendly; 4) Lack of
Treasury supply; 5) Fast approaching Y2K; 6) Seasonals are in the market's favor; 7)
Broader technicals are looking more positive.
Of course it is the negatives that are keeping players on edge: 1) A string of upcoming
monetary meetings could set off global rate hikes; 2) Upcoming October jobs data; 3)
Supply of 5s and 10s looms; 4) Defiant stock market generates consumer demand and the
wealth affect hurts fixed income; 5) Most of the shorts have already covered and short term
the RSIs show overbought conditions; 6) Real retail is not involved and may not be for a
variety of reasons. 7) The dollar is weaker vs. the yen.
The European Central Bank meets Wednesday and "ECBspeak" has become as big a
pastime as "Fedspeak" around the world. Last week, players were convinced there would
be no rate hike because of some comments from European monetary authorities.
By this morning, they were bank on ECBwatch after reading that ECB President
Duisenberg said the bank's tightening bias had increased since July.
Interestingly, it is the Reserve Bank of Australia which holds the first of the series of
monetary meetings. They meet Tuesday and some think whatever they do, that is what the
ECB, U.K. and the Fed will do as well.
Really! Remember a few years ago when the Aussie Bank's main man met with Uncle Al
privately to discuss world monetary affairs? He then went out and blabbed all the
confidential details to the international press!
After the ECB, the next biggie is October jobs. While consensus still centers around the
+300,000 level, one major dealer raised their forecast dramatically on non-farms to
+525,000. They are also calling for an unemployment rate of 4.1% and average hourly
earning of +0.3%.
Another potential for disaster could come with next week's 5Y and 10Y refunding.
Some salespeople say domestic retail was not involved when rates were higher and they
were not lured in during the rally -- even though they could have finally put some nice gains
on their books to show their bosses.
Some strategists say treasuries may not witness the degree of year- end buying from
domestic real money that many in the market expect. More players speculate the sidelined
money will stay in money funds through year end and large aggregate bond funds may be
closer to being fully invested than people estimate. And though some shops recommend
reducing cash holdings, allocations have increased. For although other variables point to
treasuries doing better, expected end-user buying may not provide a whole lot of fuel for a
rally, they add.
On the other hand, with the sharply reduced amounts of new treasury supply, some
others think that foreign real money accounts, central banks and international hedge funds
are more than enough to offset any lack of domestic money support.
Speaking of foreign accounts, Japanese accounts were selling U.S. treasuries this
morning after being consistently on the buy side for days. The dollar dropping to Y103.72
was one of the reasons cited.
But this explanation is contrary to some interesting chatter that is going on in Asia. Some
Asian analysts and traders think the government is using public funds, like the trust banks, to
support the dollar and lower the yen instead of intervening themselves. Now there is a novel
idea.
By the way, Wrightson's weekly letter contains a great chart that shows total benchmark
issuance by U.S agencies grew from less than $10B in Jan 1998 to almost $220B in Oct
1999. They are clearly creating the liquid curve they intended.
Sources say the increased liquidity is providing domestic retail and foreign customers
with 1) an alternative to U.S. Treasuries 2) a relatively safe way to pick up yield over
treasuries. It also gives agency players "apples to apples" hedging vehicles instead of using
treasuries. And for Japanese accounts, keep it mind it has been reported they do not have
to mark U.S. Agencies to market but they do have to mark U.S. Treasuries. This growth in
agency debt has also probably prevented "lack of treasury supply" from becoming a big
problem, sources say.
And it looks like there may be less supply ahead. One thing that the Bond Market
Association has proposed is that 2-yr auctions go to eight from 12 each year. But analysts
say the major debt paydowns will come in 1Q and 2Q 2000, and it is most likely any cuts in
the auction calendar will come next year. The question is how soon they will be announced.
One economist says Greenspan's Oct. 28 speech shows he was clearly impressed by
GDP revisions which "show that the New Economy has been growing faster with less
inflation than previously estimated." That may be why the speech talked stocks up. "The
Fed Chairman is the fairy godfather of the stock market," the economists says.
Wonder what Mr. Greenspan will say tomorrow morning when he speaks to America's
Community Bankers, who are convening in DisneyWorld. No one expects much because
the remarks will come via video. Besides, fairy godfather wands are not as magical as fairy
godmother wands.
And what is the U.S. Government coming to? They run a surplus. They paydown debt.
And now they are going to pay a decent rate of return on savings bonds. U.S. Treasury's
Bureau of Public Debt set today Series EE savings bond rate at 5.19% for Nov 1999 to
April 2000. The inflation bond rate will be set at 6.98% (3.4% fixed rate plus 3.58% for
inflation). Rob Ramos, Joe Plocek, Kim Rellahan, Matt Saltmarsh 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. |
