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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Benkea who wrote (23213)	8/17/1999 5:23:00 PM
From: Les H	Respond to of 99985

TALK FROM THE TRENCHES: WHY THE RALLY? WHY NOT? By Isobel Kennedy NEW YORK (MktNews) - Well that number is out of the way! The U.S. Treasury market has moved higher across the board, and the 2/30Y curve is steady at +36 bps following the consumer price release Tuesday morning. But since the number came in right on the money, what new information does the market have? sources ask. Why are we rallying? Here are some free-association attempts at explanation from some of the people we talk with: "Relief" ... "market was just very oversold" ... "a good PPI and a good CPI means the market has no place to go but up" ... "it's just a bull rally in a bear market" ... "this paves way for the Fed to only tighten once" ... "an on target number was not enough to hold this market down." Some players had been hoping for a non-consensus number, one that would add some color to the ongoing inflation debate. They were hoping that clarification about the inflation picture would break the market out of its recent range in one direction or another. Alas, it did not happen. So the odds still favor a Fed tightening of 25 bps on Aug 24 with a very small chance that Greenspan does nothing. And after that? Players expect the market to remain rangebound until next Tuesday's FOMC meeting. Some strategists say the market upside is limited to the following levels: 5.62% on twos, 5.72% on fives, 5.83% on tens and 6.00% on 30-year bonds. And what about the slope of the yield curve. The 2/30Y curve hovers around +35-36 -- the narrow spread for year. While the upcoming supply of new twos, the looming FOMC meeting and the favorabl CPI report may flatten the curve further, arbitrage accounts may be inclined to take the other side of the trade and initiate steepeners, analysts say. Some other players were seen unwinding flatteners late yesterday that had been put on at +42-44 but remain poised to sell twos again and buy 30s should the curve steepen out. Over in the sister markets, there had been some concern about widening spreads about two weeks ago when 10-year swaps spreads got out to +114, much wider than the +97 level set on Oct 14, 1998 at the height of global risk aversion. Since then, however, credit and swaps spreads have all narrowed and the concern has moved to the backburner. The 10-year swap spread was trading around +100 yesterday, sources say. Over in U.S. agencies, sources continue to see good customer buying instead of Treasurys. One salesman said he was selling two-year agency "tap" benchmark paper at +53 last week and he is now selling it at +35 today. While corporate paper has narrowed as well and new supply continues at a steady pace, some are surprised that many deals remain of the shelf despite issuers' desires to get them done before any Y2K glitches hit in the fourth quarter. Corporate sources say the dealer community is approaching underwritings in a conservative manner -- reducing risk by pricing deals to get placed with investors and not allowing the paper to sit in inventory. Not making it any easy for the dealers are greedy issuers who refuse to do a deal unless they get a top-notch price. S&P reports that 55 firms worldwide defaulted on a record total of $20.5 billion in debt in the first half of 1999 vs. 51 firms on $10.9 billion in the comparable period last year. More companies defaulted in 1998 than in any year since 1991, when it took 65 companies to default on a yearly total of $19.8 billion in debt. The high pace of defaults in 1999 is due, in some degree, to the market's increased appetite for risk as well as the fallout from the Asian and Russian economic crises, S&P said. BOJ Governor Hayami reiterated Tuesday the bank will maintain its zero interest rate policy as deflation fears persist. And the BOJ will not underwrite bonds or increase its monthly purchase of bonds. On the currency front he said "private companies should consider establishing operations that can withstand currency swings instead of relying on authorities' actions." Was he hinting at non-intervention? So far in 1999, foreigners have reportedly pumped $48 billion into Japanese stocks ... the Nikkei is up 29%. Analysts say the last time foreign investors spent more than $30 billion on Japanese stocks was in the first six months of 1996 when Japanese companies promised to cut costs and Japanese government spending surged. Sound like deja vu? In 1996, the stock market peaked and proceeded to fall 43% over the next two years. Will history repeat itself? By the way, there has been chatter lately that some Japanese accounts have been selling Treasuries to repatriate yen ahead of their fiscal half-year which ends Sept 30. Some expect this selling to increase as that date nears. The jumbo global deal from DaimlerChrysler got priced today. The company sold a total of $4.5 billion at the following terms: $1 billion three-year floating rate notes at LIBOR +27 bps; $1.5 billion of five-year notes at +115 bps over comparable Treasuries; $2 billion 10-year notes at +134 bps over comparable Treasuries. Sources say the deal was in great shape partly because it is such an unusual name. Solid demand allowed the deal to be increased first from $3 billion to $3.75 billion and then to $4.5 billion. 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.