BondSquawk

October 20, 2010

Shown below are two charts I found particularly interesting. The first shows the spread between 20y Zero Coupon and 10y Zero Coupon bonds while the second is a graph of 10y10y fwd. They both indicate that the curve has steepened considerably and 20y is now looking more expensive versus the 10y.

The reasons for the steepening can be attributed to long run inflation expectations increasing, nominal curve steepening (the steepening between the 10-Yr and 30-Yr in particular) as well as supply dynamics.

These factors seem to have affected the 10y – 20y spread as much as they could and the curve looks a little too steep. Right now may be the right time to enter into a 10Yr-20Yr Zero coupon flattener. The curve might still steepen a bit more given the volatility prevalent in the inflation market, and this can hurt some who are already short in the long end zero-coupons, but the curve does look steep. A 40-42 bp spread, which now stands at 38, might be a safe time to enter the flattener.

Courtesy: Raj Shah, RBS Securities

By Maulik Mody – Bondsquawk.com

October 19, 2010

Stocks tumbled today and Treasuries rallied after China announced an unexpected increase in interest rates. While China, which recently surpassed Japan as the second largest economy, raised interest rates to combat growing inflation, some investors believe that it will cause an opposite effect since this move will attract a lot of foreign capital into China. China raised its benchmark one-year lending rate by 0.25% to 5.56%, and raised its deposit rate by the same amount to 2.5%.

Economic Data

Supporting yesterday’s data of increase in confidence among home builders, housing starts unexpectedly rose to an annual rate of 610,000, its highest level in a five month. The number reported by the Commerce Department beat economists’ expectations of 589K. The number for the previous months was revised up to 608,000. This does not signal a strong recovery in the housing market but it surely indicates stabilization as the market struggles near its record low levels.

Building Permits for September, however, fell to its lowest level in more than 15 months as its volatile component, the multi-family homes, fell by 20.2%. Permits fell by 32000 to an annual rate of 539K, 5.6% weaker than in August. Single-family permits grew by 0.5% after falling by 0.7% in the month before. In other releases, the ABC consumer confidence for the week ended Oct 17 felling to -46, which depicts an overall negative outlook on the economy. The fall is attributed to the outlook towards the state of the economy, which fell from -82 to -84.

Interest Rates

Treasuries rallied on concerns about the global economy when China, amidst concerns that its currency was relatively undervalued, raised interest rates to combat inflation. The rate on the benchmark bond fell 3 bp to 2.48%. The long bond gained in price as its yield pushed 3 bp lower to 3.92%. The belly of the curve fell as the 5-Yr yield droppe 2 bp to 1.11%. The 2-Yr traded flat at 0.36%.

Inflation expectations, as indicated by the yield differential between the 10-Yr Treasury and an equal maturity inflation indexed bond (TIPS), narrowed by a basis point to 2.075%.

Yields ended lower among developed European nations. The yield on the benchmark 5-Yr German Bunds and France’s 5-Yr slipped 1 basis point and 3 bp to 1.55% and 1.75% respectively.

Among peripheral nations, Greece bonds fell and pushed its yield 17 bp higher to 9.24%. Spain’s bonds strengthened as its yield fell 3 bp to 2.89%. Portugal’s 5-Yr bond widened 13 bp to 4.19%. Italy’s bond last traded 3 bp lower at 2.62%.

Across the Capital Markets

Stocks slumped after China’s decision to raise interest rates raised concerns about the global economy. The S&P weakened 1.6% to 1165.90, while NASDAQ fell 1.8% to 2436.95. Dow Jones fell below to 11K mark to 10978.62. The VIX Volatility index gained to 20.63.

The DXY dollar index gained 1.8% to 78.206. Euro fell against the dollar to 1.3727. The cable (GBP/USD) also traded lower at 1.5707.

Gold spot price fell $36 dollars to 1332.05.

By Maulik Mody – Bondsquawk.com

October 18, 2010

Stocks advanced on Monday as investors expressed joy at Citigroup’s earnings beat estimates and as the confidence among home builders grew. Investors also bid up Treasuries convinced that the Fed will announce another large scale asset purchase program next month which will send government debt prices higher.

Economic Data

The National Association of Home Builder/Wells Fargo index, which depicts the confidence among home builders, increased to 16, the highest level in four months. The reading beat estimates of 14 and indicates that residential construction, albeit low, seems to be stabilizing. Although this is a good reading, we need many more readings in this territory for the housing market to recover. High unemployment keeps Americans from making the most of record low mortgage rates, and recovery remains slow after the expiration of home-buyers tax credit and increasing foreclosures.

Industrial production decreased by 0.2% in September after increasing by the same amount the previous month. Production excluding vehicles and technology fell by 0.3% versus an increase of 0.5% in August.  Capacity utilization fell slightly to 74.7% from 74.8% during the previous month. Utilization increased the most in the mining industry while it fell the most in utilities.

The Treasury department reported today that the global demand for US financial assets grew in August as investors bought on anticipation of monetary easing by the Federal Reserve. Net sales of long term equities, notes and bonds increased two folds from July. While net buying in July totaled $61.2, August saw assets worth a total of $128.7 billion being sold. Foreign investments in the US increased as investors turned away from the European debt crisis to the recovery in the US economy. The Fed indicating that it will take action soon to sustain recovery attracted even more investors.

Interest Rates

Treasuries gained as investors,  increasingly growing confident that the Fed will launch an asset purchase program as soon as next month, rushed to get a piece of as asset at what they believed was a good price to buy before the government started purchasing them.

The benchmark 10-Yr bond rallied in price pushing its yield 5 bp to 2.51%. The Long Bond gained too as its yield slipped 3 bp lower to 3.95%. The 5-Yr bond gained the most pushing its yield 6 bp lower to 1.13%. The 2-Yr ended flat at 0.36%.

Inflation expectations, as indicated by the yield differential between the 10-Yr Treasury and an equal maturity inflation indexed bond (TIPS), tightened 5 bp to 2.08%.

Across The Capital Markets

Stocks posted gains on improved corporate earnings. The S&P advanced 0.7% to 1184.71. NASDAQ gained 0.5% to 2480.66. VIX Volatility index was mostly flat at 19.09.

The dollar weakened as seen in the DXY index, which now stands at 76.934. Euro fell slightly against the dollar to 1.3934. Gold ended flat at 1136.85.

By Maulik Mody – Bondsquawk.com

October 18, 2010

Corporate bonds retreated slightly after three straight weeks of gains as high unemployment and cooling inflation convinced investors that the Fed will announce another round of securities purchases in their next meeting. Spreads widened for both the short and the long index, which track bonds less than 5 years and greater than 5 years to maturity respectively.

The short iTB index slipped 0.3% to 1092.03 during the week ended Oct 15. Corporate bonds in this spectrum could not keep up with Treasuries as investors speculated that the Fed will add short termed Treasuries to its balance sheet, hence widening spreads. The average yield increased 7 bp to 2.20% and the average spread to Treasuries widened 2 bp to 1.59%.

The leading bond in this index for a second week was Genworth Financial’s 5.75% issue due 2014. The bond gained $0.61 in price and now trades at 106.50 as its yield pushed 18 bp lower to 3.83. The spread on the bond tightened 24 b to 3.07%. The company’s stock rallied more than 2% as it announced change in two of its key leadership positions.

The longer counterpart fell considerably as investors sold off bonds in the far end of the spectrum. The index shed its gains from the previous week and declined 1.6% to 1153.50 as all bonds in the index fell in price. The average yield increased 23 bp to 3.88%. Average spreads to maturity widened 6 bp to 1.64% as corporate sold off more than Treasuries.

Although all bonds of the index fell in price, the best performer of the week, judged by the bond whose spread tightened the most, was Wal-Mart’s 5.25% issue due in 2035. The yield on the bond climbed 18 bp to 4.98%, while spread tightened 6 bp to 1.21%.

By Maulik Mody – Bondsquawk.com

October 15, 2010

Investors saw a happening day with the release of mixed economic data – cooling consumer prices, increased retail sales, reduced confidence and improved manufacturing activity in the New York region. Only to add to the eventful day was Bernanke’s speech at the Boston Fed this morning that signaled the need for the Fed to take steps as inflation remained low. Investors, not knowing how to react, continued to bewilder spectators as both the stock and Treasury markets gave a mixed performance. While Dow Jones slipped 0.3% lead by General Electric, NASDAQ gained 1% as Google reported a 32% rise in Q3 profits. Investors bet that the Fed will purchase short term Treasuries, pushing yields lower in the front end and higher in the far end of the curve.

For today’s economic data release, click here.

Interest Rates

The front end of the curve fell as short-term bond prices gained. The 2-Yr year yield fell2 bp to 0.36%. Bonds fell further out from the 5-Yr as investors sold off long-dated Treasuries. The yield on the 5-Yr inched up a basis point to 1.19%. The benchmark 10-Yr bond fell in price as its yield rose 6 bp to 2.56%. The Long Bond collapsed the most and last traded 6 bp higher at 3.98%.

Inflation expectation, as seen by the differential between the 10-yr Treasury and 10-Yr TIPS, swayed up and down but ended the day flat at 2.14%.

Yields ended higher among most European nations. France’s 5-Yr bond yield gained 5 bp to 1.70%. The yield demanded on Germany’s bond increased 6 bp to 1.49%. 5-Yr UK Gilts fell pushing its yield 4 bp higher to 1.59%.

Among the peripherals, Portugal’s bond gained the most as its yield fell 35 bp to 4.30%. Spain’s 5-yr bind yield fell 3 bp to 2.88%. Italy’s 5-Yr was flat at 2.59%. Greece’s bond fell and pushed its yield 17 bp higher to 8.93%

Across The Capital Markets

Stock performance was mixed due to earnings reports. General Electric’s revenues disappointed analysts estimates, leading the 0.3% fall in Dow Jones to 11062.78. The S&P gained 0.2% to 1176.19. NASDAQ rallied 1.4% to 2468.77 as Google reported increased third quarter earnings. The VIX Volatility index slipped lower to 19.03.

The DXY index which measures the performance of the dollar against six major currencies across the world gained to 76.962. The GBP fell against the dollar to 1.5992.

Gold settled lower at 1368.40 after touching its highest level yesterday. Crude spot price fell to 81.25.

By Maulik Mody – Bondsquawk.com

October 15, 2010

Treasuries gained in the front end of the curve and sold off in the further end as investors speculated and reacted to Bernanke’s speech and a plethora of mixed economic releases. While Dow Jones ended the day slightly lower, NASDAQ advanced in the green territory to end 1.4% stronger.

Reports from the Labor Department showed that the cost of living in the U.S. increased slower than expected, causing Bernanke to indicate that the Fed will take action as inflation cools. The Consumer Price gained 0.1% in September, after a previous month gain of 0.3% and missing expectations of 0.2%. The CPI Index excluding food and energy prices ended flat for the month. Bernanke’s speech in the Boston Fed conference sparked speculation that the Fed will announce the second round of purchases in its meeting next month.

The CPI report showed that energy prices increased 0.7% while housing prices weakened by 0.1%. Food and medical care costs increased 0.3% and 0.6% respectively. As economic data shows a reduction in inflation expectations, it gives the Fed more reason to take steps to bolster the economy.

Boosting investor morale and driving long-term Treasuries down was the report of increase in retail sales, which climbed more than forecast. Retail sales rose 0.6% in September beating economic expectations of 0.4%. Increased sales as a result of discounts offered by retailers due to the approachi9ng holiday season does not justify eased concerns among investors, especially as unemployment hovers near 10% and is expected to remain above 9% through the next year. The high unemployment rate will curb spending after retailers raise prices to normal levels.

Retail sales excluding automobiles grew by only 0.4%. Sale of automobiles improved 1.6% last month after decreasing 0.5% in August. Sale of electronic items also rose by 1.5%. Even as clothing prices declined 0.6% on sale and discounts being offered y retailers, sales declined 0.2% indicating the constraint on spending imposed by high unemployment.

Among other releases, the Empire Manufacturing Index for October rose to 15.7, widely beating economists’ expectations of 6.0. Manufacturing activity expanded in the New York region as overseas demand spurred sales. While this increase drives recovery and promotes growth, high unemployment and constrained spending indicate otherwise. The University of Michigan Confidence Index fell in October from 68.2 in September. The index for October now stands at 67.9, while economists had expected it to gain to 68.9. Investors remain pessimistic about the economy in general even on increased indications by the Fed that it will take actions to sustain the recovery.

By Maulik Mody – Bondsquawk.com

October 14, 2010

Stocks declined as increased jobless numbers and a widened trade deficit spiked concerns about the recovery. Investor’s confidence in betting that the Fed will take action increased after prices of wholesale goods rose at a very sluggish rate in September. Treasuries continued to slide and yields ended higher across the spectrum.

Economic Data

Initial jobless in the week ended Oct 9 increased by 13,000 to 462K after the claims filed for the previous week were revised upwards by 4000. Continuous claims declined to the lowest level in a year, now at 4399K.

The trade deficit for August widened more than forecast to $46.3 billion as cheaper import prices and increased demand for foreign autos and capital equipment overshadowed the gains by exports. Exports gained 0.2% compared to 2% in July, surpassed by a 2.1% increase in imports in August. Goods and services imported grew by 2.4% and 0.5% respectively, and while exports of goods remained flat, services exported gained 0.7%. The trade deficit can be narrowed only when the U.S., whose economy is mainly service oriented, starts meeting its own demands for goods and increases export of services.

In other reports, the wholesale price of goods excluding food and energy showed a sluggish 0.1% growth for a second month as inflationary pressure decreases. The Producer Price Index excluding food and energy prices grew by merely 0.1% in September, reported the Labor Department. The Fed expressed in its last meeting that is will aim its monetary policy at, among other things, increasing inflation expectations. The economy seems to be in a lull, where neither inflationary nor deflationary pressures are strong enough to cause any change in its current state.

For more on today’s economic release, click here.

Interest Rates

Treasuries continued to slide on increased supply, pushing yields higher across the curve. Long termed treasuries fell the most as seen in the 10 bp increase In the yield on the 30-Yr, which ended at 3.92%. The benchmark bond fell as its yield pushed 7 bp higher to 2.51%. The belly of the curve rose as the 5-Yr ended 7 bp higher at 1.18%. The 2-Yr yield fell 2 bp to .38% to push the front end of the curve slightly higher.

Inflation expectations, as indicated by the yield differential between the 10-Yr Treasury and an equal maturity inflation indexed bond (TIPS), widened 8 bp to 2.14%.

Yields were mixed across the Atlantic. France’s benchmark 5-Y bond ended flat at 1.65%. Germany’s 5-Yr bonds slipped slightly as its yield ended a basis point higher at 1.43%.

Yields were mixed among the peripherals nations. Yield on Portugal’s benchmark bond tightened 10 bp to 4.65%. Ireland’s 5-Yr bond yield gained and pushed its yield 21 bp lower at 4.91%. Greece bond ended its really as its yield gained 24 bp to 8.78%. Spain’s 5-Yr bond cut its losses from yesterday as its yield slipped 4 bp to 2.91%.

Across The Capital Markets

Stocks slipped on poor economic data. The S&P retreated 0.45 to 1173.81. NASDAQ ended 0.3% lower at 2435.38. The VIX index gained higher to 19.88.

The DXY dollar index weakened further to 76.542. Euro advanced against the dollar to 1.4084. The cable (GBP/USD) gained to 1.6011.

Gold continued to scale new heights as it ended at 1381.15.

By Maulik Mody – Bondsquawk.com

October 14, 2010

Initial jobless in the week ended Oct 9 increased by 13,000 to 462K after the claims filed for the previous week were revised upwards by 4000. Continuous claims declined to the lowest level in a year, now at 4399K.

Digging into the numbers, claims fell the most in California and Florida, as layoffs decreased in trade & services industry and construction & manufacturing industries.  New Jersey and Pennsylvania saw the   most layoffs from construction, rubber/plastic and food industries. As long as new initial claims are on a rise, the economy will face headwinds as job markets will be slow in bouncing back. The expectation that the unemployment rate will hover over 9% makes investors believe that the Fed will be urged to take steps to sustain the recovery.

The trade deficit for August widened more than forecast to $46.3 billion as cheaper import prices and increased demand for foreign autos and capital equipment overshadowed the gains by exports. Exports gained 0.2% compared to 2% in July, surpassed by a 2.1% increase in imports in August. Goods and services imported grew by 2.4% and 0.5% respectively, and while exports of goods remained flat, services exported gained 0.7%. The trade deficit can be narrowed only when the U.S., whose economy is mainly service oriented, starts meeting its own demands for goods and increases export of services.

In other reports, the wholesale price of goods excluding food and energy showed a sluggish 0.1% growth for a second month as inflationary pressure decreases. The Producer Price Index excluding food and energy prices grew by merely 0.1% in September, reported the Labor Department. The Fed expressed in its last meeting that is will aim its monetary policy at, among other things, increasing inflation expectations. The economy seems to be in a lull, where neither inflationary nor deflationary pressures are strong enough to cause any change in its current state.

Investigating further into the price index shows consumer goods wholesale prices climbed 0.5%, while capital equipment costs gained 0.1%. Food and energy prices increased 1.2% and 0.5% respectively.

Stocks shed their gains as investors reacted to the poor data. The S&P was 0.1% weaker at 1176, while Dow Jones Industrial Average was mostly flat at 11098. Treasuries continued to slide as the yield on the 10-Yr increased 3 bp to 2.45%.

By Maulik Mody – Bondsquawk.com

October 13, 2010

Stocks rose higher as investors reacted to China’s announcement of record currency reserves and as CSX Corp’s earnings beat estimates. Treasuries fell as the Fed’s indication that it will take steps to support the recovery eased concerns, pushing yields higher. Also fueling the rally was the increased MBA’s index, which indicated that mortgage applications for increased for the first time in six weeks.

Economic Data

Mortgage applications increased for the week ended Oct 8 increased as record low rates caused a rise in refinancing. The Mortgage Bankers Association’s index gained for a first time in six months, rising 14.6% as refinancing increased 21%.

The gain was a slight positive for the economy, as increased refinancing will decrease consumers’ monthly mortgage payments, allowing them to spend more, directly boosting the economy. More readings in this territory might indicate that the recovery will stabilize, but this may not indicate a recovery in the housing market. This will not happen unless the increase in applications are caused due to increase in mortgages taken for buying home, which remain at all time low due to high unemployment. The home purchases component of the index fell 8.5% after a gain of 9% last week. The average rate on a 30 year fixed rate mortgage fell further to 4.21%.

The U.S. Import Price Index fell by 0.3% in September, indicating that the cost of imports decreased more than forecasted. Prices fell for after three months, and the year over year increase now stands at 3.5%, which is at the lowest level in a year. This adds to the Feds concern about slowdown in inflation, which the Fed addressed in its last meeting.  The weakening of the dollar seen in the last few months will increase the cost of raw materials, and this makes some believe that the risk of deflation is low.

For more on today’s economic data, click here.

Interest Rates

Treasuries were mostly flat today as improved corporate earnings and the currency news from China allowed investors to breathe for a while. The benchmark bond gained slightly and traded a basis point lower at 2.42%. The 30-Yr bond was flat at 3.82%. The 2-Yr bond gained as its yield slipped a basis point lower to 0.36%. The belly of the curve was unchanged as the 5-Yr ended flat at 1.12%.

Inflation expectations, as indicated by the yield differential between the 10-Yr Treasury and an equal maturity inflation indexed bond (TIPS), widened 8 bp to 2.06%.

Bonds ended mostly lower across the Atlantic. France’s benchmark 5-Y bond slipped pushing its yield 2 bp higher to 1.65%. Germany’s 5-Yr bonds last traded 4 bp higher at 1.42%. 5-Yr U.K. Gilts slipped and last traded 2 bp higher at 1.53%.

Yields were mixed among the peripherals nations. Yield on Portugal’s benchmark bond tightened 8 bp to 4.75%. Ireland’s 5-Yr bond yield gained and pushed its yield 10 bp lower at 5.13%. Greece bond rallied as its yield slumped 29 bp to 8.52%. Spain’s 5-Yr bond slipped to push its yield 3 bp higher to 2.95%.

Across The Capital Markets

Stocks gained to end the day in the green as investors rejoiced CSX Corp’s improved earnings and continued to bet on the Fed announcing to take steps in the next FOMC meeting. The S&P 500 index ended 0.7% higher at 1178.10. NASDAQ gained a percent to end at 2441.23. The VIX index gained higher to 19.07.

The DXY dollar index weakened further to 77.073. Euro advanced 0.2% against the dollar to 1.3961. The cable (GBP/USD) gained 0.6% to 1.5897.

Gold reached yet another high of 1372.15. Crude spot price gained to 83.01

By Maulik Mody – Bondsquawk.com

October 13, 2010

Mortgage applications increased for the week ended Oct 8 increased as record low rates caused a rise in refinancing. The Mortgage Bankers Association’s index gained for a first time in six months, rising 14.6% as refinancing increased 21%.

The gain was a slight positive for the economy, as increased refinancing will decrease consumers’ monthly mortgage payments, allowing them to spend more, directly boosting the economy. More readings in this territory might indicate that the recovery will stabilize, but this may not indicate a recovery in the housing market. This will not happen unless the increase in applications are caused due to increase in mortgages taken for buying home, which remain at all time low due to high unemployment. The home purchases component of the index fell 8.5% after a gain of 9% last week. The average rate on a 30 year fixed rate mortgage fell further to 4.21%.

The U.S. Import Price Index fell by 0.3% in September, indicating that the cost of imports decreased more than forecasted. Prices fell for after three months, and the year over year increase now stands at 3.5%, which is at the lowest level in a year. This adds to the Feds concern about slowdown in inflation, which the Fed addressed in its last meeting.  The weakening of the dollar seen in the last few months will increase the cost of raw materials, and this makes some believe that the risk of deflation is low.

Breaking down the import index, prices of goods imported increased 0.3% excluding petroleum. Food and beverages saw a mid increase of 0.8% after a 2.1% gain in August, while cost of industrial supplies fell 1.3%. Fuel and lubricant prices fell the most, retreating 3.1% after a 1.7% gain in August.

Stocks were trading higher as investors grew confident that the Fed will take steps to bolster the economy. The S&P advanced 1.1% to 1182, as the NASDAQ was trading 1.2% higher at 2246. Treasuries slipped lower as the yield on the benchmark 10-Yr Bond gained 4 basis points to 2.47%.