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

To: Les H who wrote (33973)	11/22/1999 11:22:00 PM
From: Les H	Respond to of 99985

TALK FROM TRENCHES: TSYS FOCUS ON NEGATIVE; VOLATILITY AHEAD By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries are softer again Monday across the curve. Since the Fed raised rates on Nov 16, sources say the market has opted to focus on the negatives. And what are the negatives? 1) surging global stock markets; 2) weak European and Japanese bond markets; 3) strength in crude oil; 4) oil prices further aggravate worries of inflation; 5) fear of a possible rate hike in U.K. on Dec 9 and from the U.S. Fed in early 2000; 6) upcoming supply of 2Y notes this week. Sadly, the only bullish factors listed in Optima's daily list of market positives are, "Hopes that overall U.S. growth will slow to a more sustainable pace" and the strength of the U.S. dollar. But it's not all slim pickings on the good news front. After all, there are two early closes this week surrounding the Thanksgiving day holiday on Thursday! Gobble, gobble, gobble. There are only a few numbers out ahead of the holiday and they are sure to be analyzed with fine-toothed combs. Tomorrow is Sept durable goods orders and one economist says it "tends to be very choppy and hard to forecast, so it takes a big move to move markets. Reaction may depend on ex-aircraft or ex-defense." He looks for solid readings in all sub-components. Median estimate is +0.5% vs -1.3% in Sept. But in the last 6 Octobers, odds are about 50/50 for analysts to over or under estimate the Oct total. 3Q GDP revision is due Wednesday. Median revision estimate stands at +5.2% versus the preliminary number of 4.8%. Sources say revisions are due mostly to inventories. Here are some sample estimates. Shop---change---revision Chase..+0.5%....+5.3% CSFB...+0.3%....+5.1% LB.....+0.9%....+5.7% ML.....+0.4%....+5.2% $15 billion in 2Y notes will be auctioned tomorrow. It is unknown if it will be a reopening or not. Demand for the auction is also unknown. On the one hand, some retail demand for 2s was seen late last week at the 5.90%. And levels are approaching the cheaper side of the late Oct-Mid Nov range. It got to a 5.99% on Oct 25, sources say. On the other hand, with fear of the Fed running rampant and concerns that the curve will resume its flattening trend after tomorrow's auction, why should people buy it? others say. By the way, the 2/30Y is around +27 after being as narrow as +20 after the latest Fed tightening. The long bond hovers around 6.20%, still a decent distance from its 10/25 high yield of 6.40%. Near term resistance is seen at +32 for the curve, analysts say. Oil still has the market spooked as it marches higher. Today it was reported that Iraq rejected a U.N. plan to extend a six-month oil-for-food export program. In addition there were reports that oil-hit Saudi Arabia and other OPEC countries warned that oil cuts may be extended longer than previously thought. Players say treasuries may prove more volatile than usual this week and next for the following reasons: 1) trading is holiday thinned. NY is closed Thur and there are early closes on Wed and Fri. Japan is closed tomorrow; 2) Next Tuesday is Nov 30 and month-end index fund buying usually occurs on the last day of the month. Because of the November refunding, monthly extensions are expected to be larger than normal; 3) Nov 30 is fiscal year end for six dealers. They need to square up their balance sheets but once that is done they are out of the market and that dries up liquidity; 4) Other accounts are also looking to close their books soon and lock in any year-to-date gains; 5) Seasonal buying of U.S treasuries for year-end window dressing may not occur this year. It appears customers continue to favor agency and corporate paper. Bank of International Settlements says new issuance in all international money/bond markets reached $1.8 trillion in the first 9 months of 1999 vs $1.7 trillion in all of 1998. Announcements of international bonds in Q3 was $411 billion vs a 1998 quarterly average of $286 billion. The report also mentions efforts by U.S. and German corporate issuers to meet investor demands for liquidity and fill the gap left by reduced by U.S. Treasury issuance. The euro will celebrate its first birthday on 1/1/2000 and yet in Q3, bond issuance in the new currency was 39% of all new international debt sold. That trails only slightly behind $U.S. issuance at 42%, according to the BIS. By the way, NY Fed McDonough addressed a group of college students on the subject of leadership today. One young student, clearly exhibiting good leadership traits already, asked him why the Fed raised rates 25 bps last week. Even though he is still technically under black out constraints, McDonough said a key reason was to help remedy the U.S. current account deficit. He cited an imbalance between the supply side of the economy which can grow comfortably at 3.5% and the demand side which he warned was growing closer to 4%. So far, the imbalance has been sustained through the help of significant foreign investment in U.S. assets but McDonough warned this may not last indefinitely. "A somewhat firmer monetary policy has no doubt some beneficial effects in bringing a better order to our current account," he said. That kid probably asked the question because she day trades on the Internet during her spare time. But we wonder if she has any better insight into the reasoning of the Fed than some veteran traders who have been trying to figure them out for twenty years! Rob Ramos and Carlos Torres 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.