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

To: Claud B who wrote (24390)	9/1/1999 4:27:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

TALK FROM TRENCHES: WAITING FOR JOBS, ARGUING ABOUT CORPORATES By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries have given back their earlier gains and the market is really just marking time "waiting for the next tree to fall," as one trader said. And waiting for Friday's employment report is about as exciting as watching leaves fall. Much of that earlier uptick was attributed to professional and speculative accounts short covering and is not considered a change in overall mood. Fed/inflation fears, a deluge of sister market supply, lack of real buyers and ongoing thin market conditions are keeping market players on edge. There are plenty of outright bears out there but there is also a great deal of uncertainty. Some of the big questions are how much has the market already priced in a strong employment report? And on the flip side, what is the market's upside potential on a bond friendly report? On the downside, there is a lot of talk that the 2Y note could test the 5.875% level and the bond could re-visit the August high yield of 6.26%. On the upside, who knows? There are some bulls out there who have a very constructive outlook for the long term. Over the next several months, they believe corporate supply will have dried up, Y2K fears will have abated, credit spreads will have narrowed and the effects of dwindling Treasury supply will cause Treasury prices to do a lot better. The median payroll estimate is +215,000. Median average hourly earnings estimate is +0.3%. Analysts recently have underestimated average hourly earnings by an average of 0.1 pt in the last four months and by the like 0.1 pt in the last three Augusts. Analysts have overestimated August payrolls in four of the last six years by an average of 47,000 jobs. But the size of the miss has fallen over time to just 10,000 last year. Aug-Sep are dicey months because teachers and other school employees return to work, which routinely test the government's seasonals. As far as the Fed is concerned, Oct Fed fund futures are pricing in a 58% probability of another 25 basis point tightening at the Oct 5 FOMC meeting, traders say. But there is lots of chatter that potential Y2K bugs will prevent them from doing anything drastic into year end. Then again, the Fed's got to do what they have to do. Not everyone is so sure they wouldn't tighten in November should they feel the need. By the way, it has been a week since the Aug 24 FOMC meeting and "blackout restrictions" on speeches are coming to an end. Tomorrow SF Fed Parry speaks and he may address some of the worries about Y2K. And Mr. Greenspan will give a public speech Sept 8 in Michigan. Is there a chance some other Fed official could have some words of wisdom for the markets between tomorrow and next Wednesday? And what about all this talk about corporates? Has there ever been so much talk about so much supply with no particular names nailed down? But sources say underwriters have only one hand to play between now and year end: they are going to play each deal by ear and keep the details close to their vests to ensure success. One secondary corporate bond trader said, "after employment on Friday it will look like a ghost town around here, but come Tuesday, I expect the floodgates to open." Estimates are now up to about $70 billion corporates over the next few months. Customers are closing their books early this year due to Y2K, giving underwriters only until mid-November to get their business done, sources say. Can they bring that much supply? Sources say that if rates hold around these levels there will be good demand, especially if the new paper comes in the form of large, liquid globals. One bond broker said that tight markets are maintained all day long on at least 20 major globals in the secondary bond market. But small deals are illiquid and won't trade often because "no one cares about those tiny deals, only the big globals." And, these large globals also provide a more natural hedge for other corporate paper, another said. Hedging corporates with U.S. Treasurys is really "apples and oranges." But until fairly recently, only the Treasury market offered sufficient liquidity. If you wonder whether corporate demand can sop up the supply, take a look at these figures from Moody's. They may also answer the question about why retail appears to be buying spread product instead of plain vanilla U.S. Treasuries. Moodys says changes in foreign buying of U.S. Treasuries is associated with changes in corporate yield spreads. Foreign buying of Treasuries averaged "a blistering $206.4 billion per annum during 1995-1997. Interestingly, there were below average yield spreads between corporates and governments during that time. From 1995-97, the average spread for an investment grade industrial was only 87 bps over Treasuries. Currently, that spreads stands at +164. Japan is set to auction Y200 billion ($1.8B) 30Y bonds for the first time ever tonight. Because the amount is very small, people may not want to short it. There could be good demand from domestic pension funds and index funds who would like to own some long paper, sources say. The price talk is around +100 bps over the 10Y benchmark Japanese bond or just under 3.00%. Note the spread between the U.S. 10Y and 30Y is a whopping 10 bps! Going forward, should Japan decide to issue more long bonds or keep reopening this one to make it one large, liquid issue it would be a help. It would allow investors to make clearer comparisons with other countries that have 30Y benchmarks. And, of course, it could provide speculators with another hedging tool against the U.S. long bond. Japanese jawboning did little to help the U.S. dollar today. There is some loose talk that thin conditions during the U.S. Labor Day holiday might be an invitation for intervention. There is some rhetoric that if they don't ntervene they will loose face. At this point, weary Japanese officials are probably way beyond that tradition. 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.