TALK FROM TRENCHES: US TSYS FADE; ANOTHER NAIL IN THE COFFIN
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries opened the Friday session under a dark cloud. Weak European bonds, strong U.S. and European economic data, lackluster technicals, upcoming 2Y supply, and poor year-end liquidity have weighed on prices all week.
The market got a bit of a boost on short covering after the better- than-expected housing starts number, but the price stability was short lived.
Raging stocks pounded another nail in the bond market coffin Friday. The tech-heavy Nasdaq jumped almost 82 points to another all time high right after the opening bell.
And it looks like it is not just bond traders who are spooked. Sources in the pit say even the corn traders were selling corn when the Nasdaq shot up? What's that all about?
Few players see any relief in sight. They think that even if the market offered any value after this week's steep decline, there are few willing to stick their necks out and take a stand in this disjointed environment. Hence, poor year-end liquidity is expected to continue.
But one optimist out there said the market has already priced in a lot of bad news and there could be a bounce after the FOMC meeting next Tuesday.
Looking ahead, the 2Y will sell Wednesday. But other than that the calendar is light. Thursday will be an early close and Friday is Christmas Eve.
A senior market strategists says a 6.17% yield on 2s represents fair value based on a correlation analysis between the 2Y yield and CPI and Fed funds. Going back to 1987, she finds a 93% correlation between the variables: a 2.7% CPI and 5.75% fed funds equated to a 6.125% on 2s while a 2.7% CPI and 6.0% fed funds equated to a 6.29% yield on 2s.
The 2Y forward roll is trading at pick 2.25 bps vs. pick 3 bps earlier. Action has been choppy since the announcement date when the roll opened at an even yield. On Thursday, the current issue rallied on large call buying but was hit later in the session on reports of hedge funds liquidating short dated paper.
In other matters, U.S. November state employment data show unemployment is below the national average in 30 areas and the tightest labor markets are still in the Midwest (Iowa, Minnesota and S. Dakota). Nonfarm payrolls were up in 45 areas in November, with the strongest gains in the largest states of California, Texas, and Florida.
More bad news? Moody's says NAPM export index suggests during 1999s final three months, exports might grow by 10% annualized. This would boost U.S. growth more.
A ray of hope? One economist commenting on U.S. housing starts says the market remains hot, but the point to recognize is "that the market is no longer getting red-hotter."
A silver lining? U.S. Philly Fed's "Livingston survey" is out, and says economists look for GDP growth to slow in 2000 and for CPI to rise about 2.6% in the first half of the new year.
Bank of England Monetary Policy Committee member Wadhwani said Friday it is wrong to conclude that inflation is dead. He says inflation is a monetary phenomenon, requiring political will to keep it low and it is unclear whether the full benefits have been realized from the drop in the non-accelerating inflation rate of unemployment (NAIRU). He said he was "relatively confident" the U.K. NAIRU was below the level seen in the 1980s, helped by greater competition and labor market reforms.
Japan's MOF will announce next Monday that it plans to issue floating rate notes next year. It would be Japan's first FRN issues for 15 years. MOF officials reportedly fear that the closely watched 10-year rates would soar if the 2000 budget is funded by additional issues in that sector. The size of the FRN issues is being discussed between banks and the ministry. An initial tranche of around Y2 trillion will be offered to roll over existing issues.
By the way, The first country that could experience Y2K difficulties is New Zealand. It is 18 hours ahead of New York EST. When it is 6:01am in NY on Friday 12/31/99 it will be 00:01am on Saturday 1/1/00 in Wellington, NZ. So that Friday morning when bond people come to work they will already be able to get a sense of any Y2K glitches that are occurring overseas.
Moving around the globe, these locations will hit 1/1/00 in the following chronological order: Wellington, Guam, Sydney, Tokyo, Singapore and Hong Kong, Beijing, Bangkok, New Delhi, Moscow and Baghdad and Nairobi, Cairo, Johannesburg, East Europe, Europe, London, Buenos Aires, NY, Chicago, LA, Alaska, Hawaii, Samoa. The last place to move into the new year will be Eniwetok, which is an atoll in the Marshall Islands. Interestingly, it was the site of some USA atomic bomb testings from 1948 to 1954. There will be major media coverage beginning at least by 5am EST.
As we all know, New Year's Eve entertainment has been hyped beyond belief. Months ago, cruise lines, hotels and restaurants said they were booked so people stopped trying. But it appears the marketing blitz may have back fired. Events have been cancelled due to lack of interest and there are plenty of rooms, tables and cabins available.
In addition, it appears that Y2K has begun to scare people instead of excite them into revelry. Many are now content to stay at home or certainly very close to it.
Oddly this special night, usually reserved for celebration, has turned into an unusual work night for many. And some will be working the entire weekend. Police and FBI personnel will be fully staffed. Banks, stock exchanges, bond houses, consumer product companies, to name a few, will all have people working just in case Y2K bugs appear.
The much heralded last New Year's Eve of this century may turn into a big dud.
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. |
