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Pastimes : All Clowns Must Be Destroyed -- Ignore unavailable to you. Want to Upgrade?

To: IceShark who wrote (6883)	2/4/2000 11:13:00 AM
From: Cynic 2005	Respond to of 42523

prudentbear.com <<Here is what we hear is going on in Financial Land. Treasury bond yields have collapsed, dropping from 6.76 to 6.06 percent before settling at the end of the day today at 6.15 percent. The yield curve has inverted sharply; long-term yields are now less than shorter- dated notes. Ten-year notes closed today 30 to 40 basis points higher than Treasuries. The incredible speed at which this has occurred has rocked traders and investment houses in the credit market trading game. Last week I alerted Cafe members what was going in this, but because of the tremendous financial market implications, I will touch here briefly on what has been set in motion. The U.S. Treasury Department has made a decision to restrict the supply of 30-year bonds. This sudden change in policy has caused a surge in price of 30-year Treasuries, as demand has overwhelmed supply, much of it due to technical considerations. The dramatic rise in the price of bonds and the reduction in long-term yields has caused a rapid inversion of the yield curve. Some financial institutions have been caught with wrong-way trades on. These institutions have been "long" the short-dated instruments and "short" the Treasuries. Now those trades are under water, as the Treasury market has exploded up. This development is not good for most banks either, as by the natural course of their business they are borrowing short and lending long. This quick inversion has to reduce bank profits. Rumors began flying at mid-morning that a major bond dealer was in trouble. I heard this early from a Denver source. Then a Canadian source said it was Bank of America. That was followed by a New York source identifying Goldman Sachs as the one in trouble. A Chicago source told me the same thing. Then a European bond dealer told me the rumors over there kept bringing up Deutsche Bank and Goldman Sachs. The Chicago source said the problem was astronomical, a derivative blowup. That source, who long has had Washington sources, also told me that the Federal Reserve was in emergency session, contrary to what the Fed said in public today. More of the same just in from another Cafe member: "I have very good (trading floor-based) connections in the Chicago Board of Trade. According to my sources, Deutsche Bank is the bond dealer in trouble. Your recent bulletin indicated that the Fed denied calling a meeting to address the dealer's troubles, and that may be an accurate answer. But I have heard that rather than calling an emergency meeting for the dealer, the Fed called the meeting to discuss the condition of two hedge funds that are in deep trouble due to the change in the yield curve. Those two firms, according to my sources, would be Merrill Lynch (very interesting, given its recent flight from the commodities business) and the traders that left Long-Term Capital Management to form their own fund. I can't swear by the stories that I've conveyed, but I know the sources and have good reason to believe them." This would not be the first time Merrill Lynch got in trouble with fixed-income trading. Remember Orange County! Wouldn't that be something if the LTCM crowd and Mr. Meriwether are right back in the soup again? Another LTCM-type bailout? I would hope not. How many chances should this guy and his hapless crew get? A denial by the Fed should be no surprise. Somewhere in one of my old Midas commentaries I have a Wall Street Journal quote from Allen Binder, former Fed official and now a Princeton professor, who said something like: "The last role of a central bank is to tell the truth to the public." This just in, hot off the Bridge News wire: "Goldman shares slip on talk of fixed-income loss. "Sources dismiss rumors of abnormal bond losses at Goldman. "Goldman Sachs' share price closed the day at 85 3/8, down 5 3/4, while the general market closed much higher." In addition, Goldman Sachs has been the big gold buyer with gold rallying around $5. Does it have something to do with the firm's rumored fixed-income problems? Too early to tell, but if Goldman does have serious bond- related financial problems, it would make sense for the firm to pare back on short gold positions. Ironically, Goldman was finding it hard to buy gold today. They would come in and bid and the offers would dry up -- for Goldman has become such a big factor on the Comex that traders all want to go with them. It looks like they may be a bit too big for their britches at the moment. But the collusion crowd does not have too much fear just yet. Right at the close Hannibal Cannibals -- Chase Bank and J.P. Morgan -- sold the market down. That makes sense too. Goldman has to lighten its short gold positions, so fellow cabal members Chase and Morgan pick up the slack at the higher end of the recent gold trading range>>