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

To: Les H who wrote (34444)	11/30/1999 5:46:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

TALK FROM TRENCHES: US TSYS GET LIFT, BUT WILL IT LAST? By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries firmed in Tuesday's overnight session, fell back to Monday's levels going into U.S. data, dropped to new session lows after the data and are now trading at prices higher than Monday's close. Sources were looking for a choppy session and they got it. In the overnight session, buying was reported from European and Japanese accounts who were extending duration at month end following the November treasury refunding. Ahead of the economic releases, there were reports that the Florida hedge fund which dumped 5Y futures Monday was selling more of the same today. When the Chicago Purchasing Managers and Consumer Confidence reports failed to alleviate fears about strong economic growth and inflationary pressures, prices dipped to new session lows. The dip, however, was immediately bought by professionals who were covering profitable shorts and anticipating month-end index fund buying later in the session. They were also looking for a possible coupon pass and for the Bank of Japan to invest the dollar proceeds from its overnight intervention against the yen. The Fed never did a pass, but it is believed the Fed came in and bought under the table in the 2Y to 5Y range for the BOJ this morning. Foreign exchange sources say the total from the Monday and Tuesday interventions is in the neighborhood of $6 billion. Also buying on this dip were domestic real money accounts adjusting their portfolios in the 5Y and 10Y sector. And a European central bank was buying good size in the 10Y sector, sources say. Sources also reported very good buying in agency benchmarks from European and Japanese accounts during NY time. Keep in mind, it is believed that Japanese accounts do not have to mark these positions to market as they must with plain vanilla treasury paper. This gave treasuries some support as agency traders lifted their hedges as they sold out their agency positions. Unfortunately, all of the pluses in the treasury market seem to be of a short-term nature, sources say. Month-end portfolio adjustments, Bank of Japan buying due to dollar intervention, technically oversold conditions, and short covering on profitable trades will not last forever. In fact, "short term" in some players' minds only covers today. They think that dealers under year-end balance sheet constraints may start to unload paper later this afternoon. Some players may even set up some new shorts ahead of tomorrow's NAPM and Friday's employment report. We asked one veteran player for her long term view of the market. "Long-term? What is long term? We live day to day now!" The recent pullback in oil prices may also be temporary, some analysts say. Speculators are selling oil contracts in a bet Iraq will resume exporting oil within days. But in reality, Iraq will not be able to export as much as they have in the past since their agreement with the U.N. is revenue capped, not volume capped, and thus higher prices will result in less volume. Here's another negative tidbit: It looks like the Dec 8% long bond contract will close lower today for the tenth consecutive month. Sources say this is the first time in the 22-year history of the long bond contract that this has occurred. Intervention by the BOJ and jawboning by lots of Japanese officials overnight did little to weaken the yen. But today, U.S. Treasury Secretary Summers reiterated his strong dollar mantra and said the U.S. was watching developments in the currency market. This did give the dollar a lift, sources say. It also seems to add some weight to speculation that other countries may join Japan's efforts to weaken the yen. Last night, Japan Finance Minister Miyazawa said he might ask the G-7 for assistance but few players thought that such a request would yield any results. As far as the euro is concerned, it remains weak against the dollar but it has yet to reach parity. This is keeping pressure on European bonds but it does not seem to worry the European Central Bank enough for them to consider intervention. They appear to be willing to accept the short term weakness in the euro in order to insure long term credibility in the currency. Some say that eventually the U.S. economy will slow and European growth will pick up and the issue will solve itself. Incidentally, some traders say the Bundesbank was a commercial buyer of euros overnight. They do not suspect intervention motivated the buying. By the way, keep in mind that the Bank of England meets next Thursday. Talk is growing that they might hike rates again. December 9, they say, is far enough from year end that a rate rise would not hamper Y2K liquidity. 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.