By Rom Badilla, CFA – Bondsquawk.com
June 4, 2010
As we head toward the close, I have to wonder if people will clear the decks and stumble into the weekend with little to no risk exposure? Furthermore, I have to raise the question of if people are fearful of having positions on as they walk in on Monday, given its reputation?
The selling in equities and the flight to quality rally in bonds may have some legs with the hopes of a sustainable “recovery” being squashed for now. For the 10-Year, I expect to see us challenge and perhaps trade below the technical barrier of 3.10 percent.
I still think deflation is the bigger concern despite some chatter from Hoenig that inflation is a longer term issue. Inflation comes from scarcity amid rising demand. Slack in the labor markets, weakness in asset prices in both residential and commercial real estate, coupled with little loan growth are all recipes for stagnant growth and declining inflation expectations. Throw in the fact that the environment that we are in is fresh off the collapse of one of the greatest asset bubbles in history, risks of deflation are real. As resilient as Americans have been over the years, I wouldn’t be surprised to see more people take up residence in the “once bitten, twice shy” camp in terms of taking on more debt. Instead of “keeping up with the Jones”, people would prefer to paydown debt and save. Balance sheet repair is not just a corporate strategy but also a household one.
Watch for talk of another round of fiscal stimulus to hit the wire in the coming weeks with today’s weak payroll. Job stimulus programs now have more traction after today’s disappointment. More importantly, listen to the reaction. While I have said that the U.S. is closer to Japan via the printing press, it’s not going to be pretty as people make comparisons with the fiscal irresponsibility of Greece. Keep in mind that there’s a record number of people running for Congress seats this year simply because people are upset with government. It won’t amount to much in terms of our government but at the very least, it represents the social mood out there.
In the meantime, the 10-Year is down 15 basis points to yield of 3.21 percent.
LIBOR-OIS spread, which is an indication for banks’ willingness to lend, is wider by close to a basis point to 31.3 from yesterday’s print of 30.7. The spread on 2-Year interest rate swaps and comparable Treasuries is wider by 5 basis points to 47.
Markit’s 5-Year Investment Grade Credit Default Swap index is higher by 8 basis points to a spread of 181. Markit’s High Yield CDS index is down 1.4 percent on a dollar price basis. Check back later sometime after the close for spreads on corporate bonds in our daily, Bond Market Recap.
Euro is down 1.4 percent to 1.1996. The S&P is down 2.9 percent. Less than two hours to go until the weekend!
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Morning Update and Some Random Thoughts
By Rom Badilla, CFA – Bondsquawk.com
June 4, 2010
As we head toward the close, I have to wonder if people will clear the decks and stumble into the weekend with little to no risk exposure? Furthermore, I have to raise the question of if people are fearful of having positions on as they walk in on Monday, given its reputation?
The selling in equities and the flight to quality rally in bonds may have some legs with the hopes of a sustainable “recovery” being squashed for now. For the 10-Year, I expect to see us challenge and perhaps trade below the technical barrier of 3.10 percent.
I still think deflation is the bigger concern despite some chatter from Hoenig that inflation is a longer term issue. Inflation comes from scarcity amid rising demand. Slack in the labor markets, weakness in asset prices in both residential and commercial real estate, coupled with little loan growth are all recipes for stagnant growth and declining inflation expectations. Throw in the fact that the environment that we are in is fresh off the collapse of one of the greatest asset bubbles in history, risks of deflation are real. As resilient as Americans have been over the years, I wouldn’t be surprised to see more people take up residence in the “once bitten, twice shy” camp in terms of taking on more debt. Instead of “keeping up with the Jones”, people would prefer to paydown debt and save. Balance sheet repair is not just a corporate strategy but also a household one.
Watch for talk of another round of fiscal stimulus to hit the wire in the coming weeks with today’s weak payroll. Job stimulus programs now have more traction after today’s disappointment. More importantly, listen to the reaction. While I have said that the U.S. is closer to Japan via the printing press, it’s not going to be pretty as people make comparisons with the fiscal irresponsibility of Greece. Keep in mind that there’s a record number of people running for Congress seats this year simply because people are upset with government. It won’t amount to much in terms of our government but at the very least, it represents the social mood out there.
In the meantime, the 10-Year is down 15 basis points to yield of 3.21 percent.
LIBOR-OIS spread, which is an indication for banks’ willingness to lend, is wider by close to a basis point to 31.3 from yesterday’s print of 30.7. The spread on 2-Year interest rate swaps and comparable Treasuries is wider by 5 basis points to 47.
Markit’s 5-Year Investment Grade Credit Default Swap index is higher by 8 basis points to a spread of 181. Markit’s High Yield CDS index is down 1.4 percent on a dollar price basis. Check back later sometime after the close for spreads on corporate bonds in our daily, Bond Market Recap.
Euro is down 1.4 percent to 1.1996. The S&P is down 2.9 percent. Less than two hours to go until the weekend!