Bond Talk gives ten reasons why bonds were under pressure today.
There are many reasons for today’s rout in Treasuries:
1) Today’s inventory data provided more conclusive proof that a cessation of the recent extraordinary pace of inventory liquidation has ended. The data suggests that increases in industrial production are therefore in the offing. In turn, incomes and spending are set to increase and thereby produce a virtuous cycle of economic growth.
2) There is talk of a seller of as much as $4 billion of 2-year T-notes. Selling of short maturities is consistent with the notion that the Federal Reserve will raise interest rates this year.
3) The success of GE Capital’s sale of a record $11 billion of corporate bonds contained three important messages, all of which are bearish for Treasuries. First, the mammoth sale suggests that investment demand for corporate bonds remains strong. This is important because investors favor corporate bonds in times of economic prosperity and avoid them in recession. Second, the strong demand is further evidence of the waned concerns over issues related to corporate accounting. Third, GECC is presumably savvy about the interest rate environment and chose to tap the market before rates rise further.
4) When Treasuries consolidated over the past few days they did so with sideways movement. That’s the worst kind of consolidation following a rout and suggests that end-user demand remained weak even though prices were low.
5) The front-month T-bond contract closed a gap at 98 05/32 from December 17, rallied (as usual) but the rally was weak and the gap failed to hold as lasting support.
6) Commodity prices are rising. The CRB recently broke its 200-day moving average and industrial materials indexes have gained 10% in short order.
7) Strength in the Australian dollar and the New Zealand dollar, both considered commodity driven currencies, is consistent with the notion that commodity inflation is accelerating.
8) The Treasury market is facing increased competition for capital from the equity market, the corporate bond, and real assets. Increases in C&I loans hint that banks are set to reduce their purchases of Treasuries.
9) Former Fed Governor Meyer was said to be at Goldman Sachs yesterday and said that in his opinion the Fed would raise the funds rate to 3% by yearend. Rumors were that he believed the first hike would be seen in May or June. This should not surprise the bond market, which is already priced for rate increases of that magnitude, but the sense that those expectations might get fulfilled weighed on market psychology.
10) The double-dippers are back-peddling and increasing their GDP forecasts. |
