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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (4137)	12/29/2003 9:34:55 PM
From: mishedlo	Read Replies (3) \| Respond to of 110194

Brian Reynolds on Treasuries Dec 22 More on Treasuries and Their Impact Equity managers of all stripes dislike them, but other investors don't necessarily agree The response to our column on Friday about how the "carry trade" has regained favor reminded us how hated Treasuries are as an investment class amongst equity managers. That sentiment is shared by both equity bulls and bears. Many equity bulls think that Treasury yields are bound to rise as the economy and stock markets climb. They think that such a rise in yields would be less of an impediment to recovery than a natural response to economic strength. Many equity bears think that yields are bound to rise because they believe the decline of the dollar over the last year and half will eventually cause foreign investors to dump their Treasury holdings, and that the rise in yields will destabilize equity markets. This sentiment also extends to the popular media. We've read countless stories that contain the phrase "as yields rise", yet here we are at the bottom of a nearly-three-month old yield channel. It's important to remember that bonds are just pieces of paper and thus should be immune from trading emotions. We've written that we don't think Treasuries offer good value, and have underweighted them in our personal portfolio. We still own some, however, partly because they are one of the few instruments that pay something while potentially benefiting from global tension, but largely because of the potential factors that we wrote about on Friday. While Friday's column wasn't a prediction that yields will move lower, it should remind investors that there are large segments of the investing community (e.g. fixed income hedge funds and mortgage investors) who will buy Treasuries when it either makes economic sense for them to do so, or because they have to. Because such buying (and selling, when the process works in reverse) can lead to turmoil in the agency, swap, corporate bond and stock markets, it must be monitored. Side note: The Wall St. Journal's Ahead of the Tape column picked up on our Friday comments in this morning's edition on the front of the Money and Investing section, page C1 =================================================== From today Everybody Hates Treasuries ...or so it seems I've written that many equity investors, both bulls and bears, intensely dislike Treasuries as an asset class at these levels. I've also written how bond managers have disliked Treasuries throughout this Fed easing cycle, except for times of crisis and panic. Today, we got some more evidence on that last point. Bloomberg reported today that dealer Reid, Thunberg's weekly survey of bond managers' attitudes toward the 10-year Treasury fell to the lowest level since September of 2000. It should be noted that the 10-year was trading at about a 5.80% level back then, and fell to a 5.11% by the end of that year before falling to the 4.70% area before 9/11. So, it seems that everybody hates Treasuries, at least in public. While I've written that Treasuries aren't appealing at these levels, that doesn't mean that they are a flat-out short either, because mainstream investors seem not to have many Treasuries left to sell, and because the group of investors that tends to fly under the radar (the fixed-income hedge funds), seem to put on the carry trade whenever the opportunity presents itself.

To: russwinter who wrote (4137)	12/29/2003 9:53:23 PM
From: mishedlo	Read Replies (2) \| Respond to of 110194

Consider the immediate impact (inflation) on imported goods to the US. Not sure there will be any Consider the immediate increase in wealth of the average Chinese, and overnight reduction for them in the cost of energy and other commodities. Why is their a huge wealth affect? We have little wealth affect IMO of a falling US$. Most imported manufactored goods have actually dropped in price. Furthermore you make an ENORMOUS assumption that the Yuan will "go to the moon" or whatever against this basket of currencies and that the US $ will be affected the most. Perhaps and perhaps not. Even ASSUMING you are correct and the Yuan does soar against the US$, it seems to me that is exactly what the US wants. So who cares, other than China? Would the Japanese continue to aggressively peg the yen by subsidizing US rates after a yuan revaluation? I don't think so, as the main goal is to stay competitive with China, not the US. I think the Japanese will just let the yen trade higher. That's the quid pro quo with the Chinese to get the deal done. I disagree that Japans goal is to stay competitive with China. The goal is to keep the US buying its goods. There is a three way relationship here with the Yuan, the Yen, and the US $ that perhaps is not as easy to sort out as you think. At any rate, Japan will hardly let the Yen just rise to the moon unless it was going to do atht anyway and this latest MOF announcement was no more than a bluff. Probable impacts on the US: higher import prices=inflation, higher interest rates as Asians back away from dollar recycling. Probable? I doubt it. There is overcapacity and no pricing power on finished goods and that is unlikely to change. Could the US benefit in the short run from a stronger yen, and yuan versus the USD? Not enough? Who knows? The Euro might weaken some, as it would no longer be the only free trading major currency in the world, and because of the backup in US rates. Not sure what you mean by "backup in US interest rates", but if you mean huge hikes in the FF rate, you are quite simply barking up the wrong tree again. Finally, I consider all this "news" to be speculative and unreliable. China may merely be attempting to get Snow off its back for all we know. Do we REALLY know if they are discussing this or is this blatant speculation? Even if they are discussing this, remember that "China Time" is not the same as US time. They will do this at their own pace, in due time, and are unlikely to rush into anything. I would be interested in Jay's views but I bet they are not significantly different than mine. Mish