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

To: pater tenebrarum who wrote (23353)	8/18/1999 8:24:00 PM
From: LTK007	Respond to of 99985

thanks hb,and it does make sense.I had been confused before as to why the dollar had remained strong in face of our trade deficit,but now it is falling into place,it was simply being put aside. Thanks again.Max90

To: pater tenebrarum who wrote (23353)	8/18/1999 8:33:00 PM
From: Les H	Respond to of 99985

TALK FROM THE TRENCHES: US TSYS RECOVER FROM DOLLAR TRIP; EYE FOMC By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries have erased all of Wednesday's early losses and are currently in the black across the curve versus Tuesday's 3PM reading. The two-year note is clearly the best performer. The 2/30Y curve is steeper at +37 versus +34 Tuesday. Once again, volume is summer light and most flows are labelled professional and not customer driven. Most players blamed Wednesday's earlier weakness in the long end of U.S. Treasuries to the deep dollar-yen selloff. The dollar fell from the Y114 level to Y111.67 before stabilizing with a Y112 handle. A comment from a senior Japan LDP party official that "stopping the yen's rise artificially was impossible" was cited for the dollar downdraft. But others say it is just ongoing demand for yen from Europeans who want to be the Nikkei that caused the dollar weakness. And some contend that U.S. Treasury weakness Wednesday was merely profit taking and had nothing to do with the dollar's plunge. That argument is well taken since the new fives and tens are trading with about 20 bps apiece in profits from last week's auction levels and the bond has about 13 bps in profit. During today's downdraft, U.S. agency and swap spreads also got hit slowing their recent recovery run. A large portfolio was said to have sold $100 million each in Fannie Mae 5Y and 10Y benchmark issues. This caused sister market spreads to widen out temporarily before later stabilizing as retail buying materialized. U.S. swap spreads also got jostled around Wednesday. Sources say the 10-year rate got out to around +101 Wednesday morning after trading in the +95 to +98 range on Tuesday. Of course, this is still a lot tighter than the +114 level that was reached this past August 5 when risk aversion kicked in again. Back in October 1998, when risk aversion was at its peak, the 10-year swap spread reached +97. In the meantime, the market is just biding its time until Wednesday's afternoon two-year note announcement. Sources say roll talk this time around could be tricky since the August 24 FOMC meeting is wedged between Wednesday's announcement and the actual sale of the notes on August 25. Despite the looming FOMC and new supply, the two-year note has been the best performer on the curve. Some strategists attribute this to the fact that the 2/30Y curve is just too flat and they look for steepening trades to get executed soon. Others say the two-year is supported by ongoing talk of record global bankruptcies and a report by a major U.S. money manager who believes the recent rise in mortgage rates will put the brakes on the U.S. economy. Meanwhile the debate continues about rate hike, no rate hike. Bias change, no bias change. Discount rate hike, no discount rate hike. And as everyone knows, economists love to talk about this stuff every chance they get. Traders, on the other hand, can only sit on pins and needles until next Tuesday. And there is only one thing that is certain despite all the rhetoric: no one knows for sure what the Fed will do until they do it. But back to the dollar. One strategist notes that the dollar matters -- because the U.S. Treasury is dependent on foreign flows. About 1/3 of marketable Treasuries are held by foreign accounts. He notes foreigners bought an average of $170 billion a year from 1995-97 when the dollar rose 20%. In 1998, with the U.S. dollar peaking, foreign purchases were just $50 billion. And so far in 1999, foreigners have divested $19 billion in holdings. We add that most of the selling so far has been in trading centers -- holdings booked in the U.K. are off $12.8 billion, and in Netherlands Antiles -$1.3b, probably reflecting hedge fund activity. One Chicago-based strategist says he does not believe US dollar weakness versus the yen is a "big deal for bonds." He attributes the yen"s rise vs the dollar to "global growth revaluation," with Japan finally starting to stage an embryonic rebound and the U.S. beginning to see a slowing in domestic demand , as evidenced by recent sluggish housing data. If overall U.S. demand slows, so too does U.S. demand for imports. So the higher yen will have less of an impact, he reasons. He advises buying today"s dips and says 6% bonds "will seem like a bargain" later. Along these lines, some analysts think there might be a growing perception that global rate hike fears are abating. They look for European and Japanese recoveries with balanced or steady U.S. growth and a continuation of low global inflation. They say this adds up to a "steady as she goes" attitude and reduced expectations for global rate hikes. For those who missed a Bloomberg story on Warren Buffet yesterday, it basically said he invested nearly $10 billion in fixed-income securities last quarter and pared down cash holdings to $4.2 billion vs $14.3 billion earlier this year. Of course, players have not heard his name in a long time in the U.S. Treasury market. And if he is like every other real buyer, he is buying U.S. agencies and corporates and not U.S. Treasuries. Lastly, watch for the German IFO release around 4:00 EDT Thursday morning. If the data is weak, it would be a plus for German bunds, UK gilts and U.S. Treasuries on the followthrough, sources say. Of course, the opposite could occur. 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.