Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

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

To: Les H who wrote (39374)	2/7/2000 8:01:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

TALK FROM TRENCHES: TSY VOLATILITY EASES; CALM BEFORE STORM? By Isobel Kennedy NEW YORK (MktNews) - Luckily, the market is calmer Monday after last week's chaos. But is this just a calm before another squall? Is the market just too tired to trade Monday after last week's frenzy. Where do we go from here? Let's take things one step at a time. This week's focus, of course, is the refunding of 5s, 10s and bonds. How the market digests it is up in the air especially since everything is "upside down", one source said. Prices have backed off last week's levels and that is a good thing, especially after the bond went through the roof. 5s have seen selling Monday on a continuation of Friday's trade that saw selling of 5s to buy long principal strips, sources said. In general, 5s are expected to set the tone for the week. Who buys the "poor man's bond" anyway? In the August refunding, one analyst estimated 71% went to dealers, 9% to foreign accounts and 9% to the Fed, 5.6% to individuals, 4.5% to investment funds, and 0.6% to banks. The WI 5Y is currently at 6.75% versus an award level of 5.88% last November. 90% was awarded at that level, by the way! The award level was 6.04% in the August refunding. The 10Y sale follows on Wednesday and talk that it could take benchmark status away from the bond may spark interest for the issue, sources say. The prior three 10Y sales had 82% awards to dealers at auction, 10% to investment funds, 3% to banks, Treasury said. Interestingly at the November reopening of the August 10Y, only 8% was awarded at the high yield of 6.007%. The 10Y roll continues to pick up interest. Players are now willing to give about 7 bps to roll into the new issue versus the opening level last week of give 4.5 bps. The bond sale is two days off -- too long a time to talk about! The forward roll activity in long bonds remains subdued as players are very cautious about shorting current bonds, sources say. What an astute comment after last week's giant bond squeeze. Bond people are such quick studies. Some strategists are calling for a poor bond auction, especially since the sale is the day before retail sales on Friday. Going forward, a general deterioration of the market could occur until the long end hits 7.00%. Another negative is that some players point out that the latter part of February usually proves to be seasonally unfriendly for bonds. On the other hand, given the frenzy to buy the "soon to be extinct" long bonds last week, when the current cash issue got to 6.02% and the WI to 5.92%, you would think insurance companies and pension funds would jump at the chance to load up at 6.25%. As for the bigger picture, all this supply is being underwritten in a very slippery climate. Last week's employment report has the market spooked about another rate hike on March 21. And the current curve inversion puts a monkey wrench into lots of things. According to Merrill Lynch analysts no two curve inversions are alike, but they do last a long time. The last 4 inversions ran from 7 to 20 months. Yields dropped in all cases once the curve returned to a positive slope. But sometimes rates rise and sometimes rates fall when the curve is inverted, they say. On the inflation front, first it was oil and now it is gold. Feb COMEX gold futures remain well over $310 an ounce level. One NY strategist says the best explanation of last week's gold surge is that major gold producers, such as Placer Dome in Canada, are abandoning their practice of hedging their gold production. But he points out the producers are doing so because they feel gold might soon rally. The strategist concludes the rally in gold prices is a further sign recent disinflation is over and that inflation will eventually edge higher. In the other credit spread markets, agency, corporate and swap spreads all tightened to treasuries Monday. But these markets have some problems of their own to worry about right now. For example: How do you price 30Y corporate and agency paper with no viable 30Y treasury benchmark? Will people go along with using the 10Y treasury as the pricing benchmark or will another vehicle have to be found? If the 10Y treasury is used as the benchmark will that create more problems as it becomes special in the repo market? Given the yield curve inversion, is it better to judge relative value by talking yield to maturity instead of spread to U.S. Treasuries? In which markets will spread traders find the most liquid hedging opportunities -- agencies, swaps or corporates? In the mortgage market, there is street chatter some players may be upping mortgage allocations in their model portfolios. Prepayments from FNMA and GNMA are said to be slow and therefore fewer prepayments are hitting the market. This coupled with a lack of new MBS supply is lending support to MBS paper, sources say. Forgot about the woes in the American markets. Things never get any better in Japan. EPA Sakaiya said Monday that Japan may have contracted for the second quarter in a row in the October to December. So why was there talk of asset allocation out of Japanese bonds into Japanese stocks overnight? 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.