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

To: Les H who wrote (34941)	12/9/1999 1:28:00 PM
From: Benkea	Read Replies (1) \| Respond to of 99985

Les: Miller is also buying BRK. It's about time he woke up :-)

To: Les H who wrote (34941)	12/9/1999 5:06:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

TALK FROM TRENCHES: US TSYS AWAIT LAST PPI OF THE YEAR By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries are unchanged in the short end and a tad better in the longer end Thursday in lethargic price action. The market is treading water ahead of Friday's important producer price index release, sources say. The general feeling is that the number will be market friendly and a consensus number is likely to cause prices to grind higher. Even if there is some price pressure from oil, it will largely be ignored, sources say. U.S. Nov import prices were released at 8:30 a.m. ET and excluding oil prices they did not show any signs of imported inflation, some economists say. But one long-time market bear says this morning's U.S. import price data suggests the weaker dollar is "no longer providing a suppressing influence on inflation." With today's report, import prices are now up 5.5% year over year and that compares unfavorably with the 6.5% year over year decline last year. He says import prices will no longer contribute to a lower inflation rate. And combined with the reversal in oil and healthcare costs, "temporary" factors that had restrained inflation are now working against the bond market. But for now, a senior market strategist sees the back end of Treasuries doing better for the remainder of 1999. Although the upcoming inflation data should be benign and market friendly, recent hawkish Fed official comments indicate a better than 50% chance the FOMC moves to a tightening bias at the Dec 21 FOMC. If that occurs, she says it may actually help the long-end if the market perceives the Fed as being pre-emptive on fighting inflation. As far as the front end is concerned, shorter dated paper is likely to underperform ahead of a new 2Y which has a bad settlement date of 12/31 (hello Y2K!) and worries the Fed will move to a tightening bias at the Dec 21 FOMC, sources say. Analysts recommend that people start to unwind steepeners and put on flatteners which should profit over the next two weeks. 10Y paper appears attractive on the curve when looking at the 5s/10s spread or in the 5s/10s/30s butterfly. A senior market strategist says today's $3B FHLMC 10Y deal pressured U.S. treasury 10s, causing the 5s/10s spread to widen to 10.5 Bps, a 61.8% retracement of the Sept-Nov flattening. In the 5s/10s/30s butterfly, 10s offer a pick up of about 2 Bps vs. its cheapest level of pick 3.3 Bps last seen during the refunding. Looking at the back-end, while some sources say 10s are cheap on the curve, others note that long bonds may continue to play catch up with shorter paper and so traders look for additional narrowing of the 10s/30s spread. They think it is even possible that 30s may invert to 10s. Benign PPI and CPI reports coupled with anticipated ratelock selling in 10s to set up for an onslaught of new corporate supply in January could add to that flattening, strategists say. However, a salesperson cautions that if the perception of a Fed falling behind the inflation fighting curve gains ground, "long bonds will get crushed." On a historical note, some players are bullish because of the following market chatter: Sources say stock/bond portfolio ratio analysis shows that a 70/30% mix has migrated to a 75/25% mix. This same thing occurred in the end of 1994 (when the Fed tightened 300 bps) and into 1995 as the mix went back to 70-30% from 75-25%. The selling of stocks and buying of bonds was part of the reason bonds rallied 200 bps in 1995. The same oversold mechanics exist today, sources say. Earlier today, European central banks and Middle East accounts were seen selling short-dated U.S. Treasury coupons and buying EMU-11 paper. Sources say this could be because they feel the euro-dollar has finally found a bottom or it could be year-end window dressing. But not everyone is doing this. Earlier this week and last, foreign accounts were selling the very short end of the U.S. Treasury curve and putting the money out the curve in off-the-run 5s and 10s. And the recent Fed custody holding report showed foreign buying of U.S. treasuries up $13.4 billion last week and $19 billion over the last 3 weeks! That's huge, kids! However, there is still some concern that the weaker dollar might cause Japanese accounts to liquidate U.S. treasury paper. Earlier in the week, the Nikkei was hit on talk of accounts selling profitable equity positions to offset losses in foreign bonds. On the other hand, the MOF said Thursday that resident investors were net buyers of overseas stocks for the tenth consecutive month in Nov. They bought Y290 billion (Y102 = $2.8B). One foreign exchange commentator says, "The yen's appreciation and volatility apparently encouraged Japanese investors to have a preference for international equity rather than fixed income investments." And keep in mind, the Japanese have been buying U.S. Agency paper for some time now, sources say. They no doubt participated in Freddie Macs 10Y re-opening today. The $3 billion issue was priced at +63, tighter than original talk of +63.5. Salespeople say overall demand for the issue was decent whether investors were involved on a cash/outright basis or on swap vs. other agencies or Treasuries. Including today's $3B of new supply, the total size of the FHLMC 6.625% due 09/15/09 benchmark now stands at $9B making it the largest agency benchmark in the 10-year sector. Second in line is Fannie Mae's 6.625% also due 09/15/2009 with $8.5 billion outstanding. Quote of the day from Boris to Bill via Interfax: "Clinton allowed himself to forget ... what Russia is and that Russia has a full nuclear arsenal, but Clinton decided to flex his muscles." And this is coming from the leader of a country who's Y2K readiness is questionable! Well, maybe Boris was just cranky since he just got out of the hospital again! And in a nod to Y2K liquidity concerns, the Bond Market Association now recommends that repo desks remain open on Christmas Eve to clear year-end repo options that can be exercised that day, according to a release on its web site. BMA is still calling for early Dec 23 close at 2 p.m. and full close for cash bond market on Dec 24. Fed's first strike date for overnight repos is Dec. 23 and they can be renewed on Dec. 24. Dealers will maintain at least partial repo staffing that day, sources say. --Rob Ramos, Suzanne Cosgrove 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.