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

To: Les H who wrote (33683)	11/18/1999 4:27:00 PM
From: Casaubon	Respond to of 99985

Oh! So that's where the extra liquidity is going to come from <ggg>

To: Les H who wrote (33683)	11/18/1999 4:34:00 PM
From: Les H	Respond to of 99985

TALK FROM TRENCHES: TSYS DOWN AGAIN; FED STILL A HEAD-SCRATCHER By Isobel Kennedy economeister.com NEW YORK (MktNews) - U.S. Treasuries are lower for the third day in a row Thursday. Sources say the market just can't seem to shake off rate hike fears. And while there are still some bulls out there who are looking for lower yields as year-end nears, there seems to be a growing number of people who are bracing for another rate hike as early as January, as soon as Y2K concerns have passed. But is that a rational concern, some players ask? After all, it was liking pulling teeth to get the rate hike from the FOMC that the market seemed to want in the first place. But instead of rallying in relief when the hike was out of the way, the market has given back about 40% of the gains from its Oct 25 to Nov 16 rally! Is the Fed really ready to hike another 50 bps in Jan? Do people think they would love to pull the trigger as soon as Dec 21 if only they didn't have that annoying problem of Y2K in the way? If so, why didn't they shock the market and raise rates 50 bps on Tuesday? Or why didn't they leave the tightening bias in place? Instead they said the recent hike is enough to keep inflation from being a problem for now and they really want the economy to slow because "the expansion of activity continues in excess of the economy's growth potential." One seasoned salesperson remains positive on Treasurys even though market psychology seems to be "changing on a whim". Although Tuesday's FOMC statement is negatively viewed, he believes the Fed is not currently predisposed to tighten. His response to some customer accounts posing the argument of a 50 Bps tightening in Feb because Y2K concerns will keep the Fed sidelined on Dec 21: "one can't reasonably make those assumptions now when we've seen no economic data to back that position". But one NY strategist who is also a well-known bear writes that while Fed chairman Greenspan "sugar coats his medicine" at the start of rate cycles, he practically shovels medicine down the economy's throat when he feels prior doses were too small. Therefore, if the holiday shopping season gives the economy significant momentum going into 2000, a 50 Bps rate hike should be considered a possibility at the Feb 1-2 FOMC meeting, he says. The chances of a hike will increase if the equity rally continues, commodity prices rise, and labor indicators remain tight. Away from the Fed debate for now, did prices back up this far because the rally was based almost solely on short covering in the first place? Or is it because retail is buying spread product when normally at this time of the year they are window dressing with U.S. Treasuries? Or is it because many players are so confused now they are just throwing in the towel. "The last three years have seen some strange happenings in the world of treasuries and maybe no one knows the rules anymore", one perplexed salesperson complained. How right she is -- global crises; historic spread widenings; the Fed bailing out a hedge fund; the growth of corporate and agency global supply that is taking the place of the treasury market in size; electronic trade replacing human beings; dealings over the Internet instead of through the broker screens; and now Y2K. Part of today's weakness was in sympathy with the downdrafts in European and Japanese bonds, sources say. Prices of European bonds got hit overnight on unexpectedly strong Q3 French employment data. The marked improvement in the German Ifo outlook did not help either, sources say. After initially greeting rate hikes in Europe as a relief, European players now seem to be following the U.S. lead and are showing nervousness about more rate hikes, too. The ECB, as expected, left rates unchanged at its bi-monthly meeting. But players are now wondering if the U.K. could raise rates again at its next meeting on Dec 9. Keep in mind that yesterday the minutes of the Bank of England November meeting were released. They voted 8 to 1 for the 11/4 25 bps hike but some members had considered a 50 bps hike. Analysts say that U.K. officials refer to Y2K as "no problem". So, unlike the U.S. Fed who probably would avoid raising rates during the year end turn, does that mean Y2K would not prevent the BOE from raising rates at that time? It has been a nasty week for Sweden, too, as wage-pressure scares mount. Riksbank's Bergstrom said Thursday that the central bank will be confronted by the unpleasant task of constraining the economy in order to prevent excessively high wage increases from impacting inflation. Poor Japan. Yesterday's rumors about a possible downgrade were followed up by negative comments from Moody's today. An official there said that the Japanese public-debt-to GDP ratio would exceed that of Italy within 1 to 2 years, and that there was no clear sign that the liquidity supplied by the BOJ would revitalize demand in the private sector. He also added that Moody's would review its ratings of Japanese government bonds in 6 months. Back in the USA, treasury prices have been largely driven by spread product supply and the soggy tone was due to the robust Philadelphia Fed survey. Ratelock unwinds helped support price earlier in the session. But later, some dealer selling was seen as traders set up hedges on the new sister market supply that was coming into their inventories. In addition, real money was reportedly selling treasuries to make room for the sister market supply, as well. Recap of non-treasury supply that sold today: $2B Freddie Mac 30Y bonds; $2B Canada 5Y globals; $3B Lockheed Martin 6Y, 10Y and 30Y tranches. Rising oil prices are another thorn in the side of the U.S. Treasury market. But some analysts say oil price worries may be overblown based on previous price patterns. They point out that, for the most part, prices have been comfortable for long periods of time, assuming $20 a barrel as being comfortable. They point out that price pressures have blossomed only a few times since 1986 and most importantly, those periods of time have been shortlived in nature. Since 1986, price pressures existed between July 1990 to January 1991, July 1996 to January 1997, and currently July 1999 to the present. Analysts say that if prices peak in early 2000 and repeat the same pattern of returning to $20 a barrel or lower for a long period of time, the 1999 oil price concern may prove to be overblown. They also say that since latest price rise started from such a low base of $10.72 on December 10, '98, too much attention has been made to the recent rise. By the way, there are concerns in the emerging market sector about Russian Paris Club debt talks. Players are also still on edge about Standard and Poor's downgrade of Pakistan on Tuesday. They lowered the eurobonds to "D" from "CC" as a result of the exchange offer launched by the government on Monday. --Robert Ramos and Kim Rellahan contributed 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.