May

23

Bloomberg GrabA chart of bonds showing this lowest since November and yields going up is not auguring very well for housing as credit rationing and high interest rates in a declining job market are twin killers.

George Parkanyi writes:

I've lived that chart. I fortuitously put on a double-short Treasuries ETF position on the last day of 2008. The position has been bypassed by my re-allocation signals because it's been kind of a tortoise, so it has slowly evolved into a nicely profitable trade. However, in the last 2 days it jumped sharply to new highs. I believe there has been a tectonic shift in psychology that now puts currencies (particularly USD) and government issued debt on the defensive - due to the downgrade of the UK government. Telling was the sharp drop in Treasuries on the same day as a big drop in stocks. What, no flight-to-kwality?

Just the IDEA of the paper of a major western power suffering a downgrade - the notion that it can happen at all - has started something new in the currency, debt, and inflation-hedge markets. This now gets very interesting.


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9 Comments so far

  1. Rocky Humbert on May 23, 2009 3:21 pm

    In "normal" markets, Vic is exactly correct. However before rushing to judgment, one should also consult a chart of the 30-yr Agency mortgage market. Bloomberg: FNCL 4.5 GP

    [For Dailyspec readers without a Bloomberg, the mortgage market remains near its all-time highs. For the moment, declining T-Bond prices have not impacted mortgage rates.] Note also that Congress last week raised the FDIC deposit insurance coverage to $250,000 through 12/31/13. Ceteris Paribus, this should move more money out of "riskless" treasuries and into the deposit/credit markets.

  2. michael bonderer on May 23, 2009 3:59 pm

    Supply/Demand:

    i caught a piece from FTs John Plender a while back and he made an interesting observation:

    ….”That said, what is now happening in the Anglophone economies is that over-indebted households are rebuilding their balance sheets. The private sector’s desired savings rate is increasing, while debt is being paid down. In effect, the public sector has replaced the household sector as the engine of borrowing.

    At the same time, the protracted decline in commercial bank holdings of government paper is set to reverse. In the period following the second world war, banks on both sides of the Atlantic held as much as 30 to 40 per cent of their assets in government paper. By 2007, when the credit crunch began, that had fallen to next to nothing, leaving the banks unusually vulnerable to liquidity problems.

    Revisions to the Basel capital regime in response to the financial crisis will put greater emphasis on liquidity. The percentage is thus set to rise again.”

    Short term i would be careful trading the short-side of 10 and 30s.

  3. David Riffer on May 23, 2009 6:31 pm

    Seems like the Feds have determined that they cannot control all rates, and are settling for driving mortgage rates for now. How else to interpret lower dollar, higher commodities, higher rates and stocks treading water? It looks like it’s all one trade, with options expiry yesterday just adding fuel to the fire with a 119 magnet on TYM9.

  4. vic niederhoffer on May 23, 2009 9:14 pm

    The post espoused a bearish view for housing activity, not bonds. However, one has noted that during the summer one market or another gets slaughtered so that the strong can take chips from the weak during summer when the contribution from the vig is not as great. One might hypothesize that it would be bonds or the dollar this year. Somehow the reduction in economic activity Y and the expansion of money M would seem to equate to a higher P. vic

  5. joeC on May 25, 2009 12:20 pm

    Victor: Bonds have fallen in price while the stock has gone up all through this period you show.

  6. jamshed nazar on May 26, 2009 5:33 pm

    Flash back from the March Fed annoucement,
    10 year went down from 3 to 2.5 with just the Fed intention annouced to buy just 300 billion of treasuries.
    The Fed needs low mortgage rates in order to clear up the buildup in inventories. The only way to keep the rates low is to influence the long bonds. The Fed must increase its purchases by atleast another 600 billion before september.
    This would achieve three goals,
    1) low mortgage rates –> good for housing
    2) absorb treasury auctions and monetize the deficit where the Chinese and other Sovereigns are shrugging
    3) Keep the dollar low, improve on exports and import inflation to boost the economy

    Either the fear or “isk averse” climate can keep the long bonds low or the Fed interventions. Both work in the favor for the housing market!

    Dollar reserves held globally are around 6 trillion. A small shift out of it, say 10%, would bring out 600 billion of treasuries on the market - in addition to the 1.8 trillion already to support the 09 budget.

    All this is dollar negative.

  7. Aaron on May 27, 2009 8:06 am

    Sorry for the noob question, but what software/website is that?

     [Ed.: the bond chart is from Bloomberg, a subscription service]

  8. Nick Sont on May 27, 2009 3:51 pm

    I think that one can now disregard Mr. Humbert’s comments.

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a19kjdPxKPpk

  9. Rocky Humbert on May 27, 2009 6:16 pm

    Nick:
    You are correct: the FNCL 4.5 broke down today. My observation was that prior to today, it was entirely a spread tightening. Now we'll find out whether the Fed is serious about targeting mortgage rates.

    Incidentally, if you want to be bullish on housing and construction, lumber closed limit up today

    I am not expressing a view, just observing that one can always find a datapoint to "prove" one's bias.

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