All about how Japan's nuclear accident (today) affected the U.S. bond market (!)
This is from today's Bridge News. Since Bridge updates every day, I am copying the text of today's comments (before it is gone). But here is the URL for anyone who is interested :
news.bridge.com
US Credit Review: Up on quarter end, Japan nuclear problem
Updated Thur Sept 30 18:06 ET
New York--Sept 30--Treasury prices rallied today, breaking a 3-day losing
streak on a combination of short-covering triggered by Japan's nuclear power
plant accident and quarter-end buying. Traders said the Treasury market was due
for a bounce given the losses it had suffered in recent days.
* * *
The bond market "just got too beat up (Wednesday) and it reversed itself a
little bit" today, said Mike Landreville, a portfolio manager at the Lutheran
Brotherhood. "It's month end and quarter end, and there's some rebalancing. And
it's a little bit because of flight to quality from this Japan nuclear problem."
The market's improvement occurred in spite of an unfriendly price reading.
Treasury prices sold off briefly at midmorning when the Chicago purchasing
managers' September survey showed an alarming spike in its price component,
which hit the highest level since June 1995. But the market soon rebounded as
traders decided the price component just reflected the crude oil surge they
already knew about.
As prices bounced, traders said unease about the nuclear accident at a
Japanese uranium plant seemed to be encouraging short-covering. The accident at
the uranium processing plant 85 miles outside of Tokyo sent 3 workers to the
hospital, exposed 11 other workers to radiation, and caused some evacuations of
area residents.
Traders said the Treasury market's gains reflected hopes that the accident
will send Japanese stock prices lower tonight. There was also speculation that
problems caused by the accident could dampen Japan's nascent economic recovery.
Investors worry that if overseas economies are starting to revive, that will add
to the US economy's strength and to the pressure on US prices.
"I didn't realize nuclear accidents were flight-to-quality trades, but
that's the way the market reacted," a bond trader said.
He said some players "think the nuclear accident will potentially cause the
(Japanese) Nikkei (stock index) to trade heavy tonight, or cause some disruption
in Japan and could slow their growth."
"Maybe there's less of an argument now that Japan is coming back and that
that will negatively affect the US," the trader added. Some Treasury traders
argued the nuclear accident could result in other developments that would be
less friendly for bonds, including upward pressure on energy prices if Japan
cuts back on its use of nuclear power or a rise in agricultural prices if
fallout from the accident damages crops.
Mike Ryan, senior fixed-income strategist at PaineWebber, said part of
today's rally just reflected the fact that after the last few days' losses,
"bonds hit a level where people were interested in coming back in."
Ryan said he was a bit surprised at the magnitude of the bond market's gains
given the strength in US stocks today and because there w
ere some troubling statistics in today's economic releases, particularly the
rise in the Chicago purchasers' price index.
The Dow Jones industrial average closed up 123.47 points, or 1.21%, at
10,336.95.
Bonds "somehow shrugged off the Chicago PMI prices paid, but I'm not sure
the market would be quite so sanguine if there were to be a big increase in
(national) prices paid," Ryan said. "If it spikes materially above 60, I think
the market has a little bit of a problem with it."
The September index from the National Association of Purchasing Management
due out at 1000 ET Friday is expected to dip to 54.0 from 54.2 in August. The
August price reading came in at 59.8.
Today was also the end of the third quarter, and players said some of
today's buying seemed to reflect that.
"We've been in this fairly narrow trading range for the last month," said
Mark Mahoney, a Treasury market strategist at Warburg Dillon Read. "There was a
lot of cash that had to be put to work at month end by retail (accounts) and
that's what I think sparked the whole thing."
Meanwhile, the wild swings in commodities prices that worried the market
earlier this week weren't a factor today. Gold inched a little lower, but stayed
close to the key $300 an ounce level, and crude oil fell 18c to close at $24.51
a barrel.
By late Wednesday, the market's string of 3 down days had pushed prices to
the low end of their recent range and had some players calling for a break to
new lows. T
oday's bounce in prices reaffirmed that Treasuries remain stuck in a range.
"We've pretty much been in a trading range since May, and I'm just going to
say we stay in a trading range until we get above 115 1/2 (on the Dec bond) or
until we set a new low" below 112 1/2 on the Dec bond, Landreville said.
"In between those levels, I'm just going to stay neutral," he said. "But my
bias is still toward lower rates and higher bond prices. We've done so much
damage already this year, I think it's due for a rally."
Looking ahead to next week, traders expect Fed officials to leave rates
unchanged at next Tuesday's Federal Open Market Committee meeting. A Bridge poll
of 20 economists found they see just a 31% chance the Fed will hike rates
Tuesday, but a 49% chance the Fed will reinstate a tightening bias at the
meeting.
A note trader said current levels on 2-year notes show the market sees a
chance the Fed could move to a tightening bias. Given the 2-year note's spread
to the fed funds rate, there's "a cushion in there for a bias," the trader said.
"It would not be as toxic as 'Oh my God, they're going to go.'"
At 1556 ET, the 30-year bond was up 1 1/32, bid at 100 30/32, where it
yielded 6.047%, and the 10-year note was up 19/32, bid at 100 26/32. Treasury
bill rates were mixed.
Treasury prices started to do better in overseas trading. Firmer European
bond markets and soft European stock markets helped, as did a report that
Argentina's undersecretary of finance saw a high probability of a Moody's
downgrade as the country holds its elections the week of Oct 24.
The bond market managed to inch a little higher in early US trading, as it
ignored the first set of economic releases.
Second-quarter GDP was revised down to a 1.6% gain, the slowest pace in 4
years, from the 1.8% increase reported previously, but bond traders are more
interested in the third quarter than the second quarter at this point.
Jobless claims spiked 25,000 to 299,000, which was in line with
expectations. As the increase was probably the result of Hurricane Floyd rather
than any weakening in the labor market, the claims report didn't affect Treasury
prices either.
There were also a few regional readings on economic growth. The purchasing
managers in Cincinnati reported moderation in both growth and prices, while New
York purchasers saw continued robust growth but higher prices, with the price
index hitting its highest level since June 1995.
At midmorning, Treasury prices erased their early gains and briefly moved
into negative territory when the Chicago purchasing managers report also showed
a much higher price reading.
Its price component jumped to 71.3% in September from 63.8% in August, while
the overall index fell to 53.8% from 56.1%.
Susan Hering, an economist at Carr Futures, said the Chicago purchasers'
report was "the worst of all possible worlds" from the Fed's point of view.
Fed policymakers "have made inflation their objective. If you see inflation
move up, I think the Fed will be forced to tighten," Hering said. "If that comes
in the context of a slowing economy, it's going to be politically difficult."
She said, though, that the rise in the price component probably just
reflected the big increase in crude oil prices during the survey period.
In other midmorning news, August single-family home sales rose an unexpected
2.9%. Economists had been looking for a decline, but the August increase was
offset by downward revisions to both the July and June data.
Treasury prices soon headed higher, though. Traders said the market had been
expecting an unfriendly price reading on the Chicago report and had already
largely priced it in.
Traders had also started to talk about the nuclear accident in Japan, which
was pushing the dollar higher against the yen, and they said that seemed to be
fueling some buying. As the day wore on, the news of a severe earthquake in
Mexico added to the market's jitters.
Bills had a good bid for most of the day, but 3- and 6-month bill prices
took a hit late this afternoon when the Treasury boosted next Monday's bill
auction by $2 billion, to $16 billion. Analysts had expected the bill auctions
to be increased in October, but not by $2 billion all at once.
At 1556 ET, following were key coupon prices and bill rates in the cash
market, compared with levels at Wednesday's close:
Fed funds: 5 5/16%
3-mo: 4.73 up 0.03 5 1/2% (2-yr): 100 up 3/32
6-mo: 4.79 up 0.02 6 % (5-yr): 100 30/32 up 10/32
1-yr: 4.94 dn 0.02 6 % (10-yr): 100 26/32 up 19/32
6 1/8% (30-yr): 100 30/32 up 1 1/32
End
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