BondSquawk

By Maulik Mody – Bondsquawk.com

November 30, 2010

Despite economic releases that showed that manufacturing expanded and consumer confidence in the US grew, stock markets fell to end the month on a sour note. Both the S&P and NASDAQ fell slightly during November. Treasuries rallied today as yields fell across the curve, but yields are higher compared to last month, not in line with the Fed’s interests of reducing rates even further. The yield on the benchmark 10-Yr note increased 22 basis points after the Fed’s announcement of purchasing assets worth $600 billion by next year.

Economic Data

Improving sentiments amidst the euro zone debt crisis and tension between the Koreas, the Institute of Supply Management – Chicago reported that businesses in the U.S. grew at a faster pace than expected. The Chicago Purchasing Manager Index increased to 62.5 during November, its highest level in seven months, from 60.6 in October. Economists had expected it to drop to a level of 59.9.

Consumer confidence increased to a five-month high of 54.1 in November as sentiments about the recovery improved on better income and spending in recent times. This reading brings up the 3-month average slightly higher to 50.9. While the gauge for the present economic situation increased slightly, expectations going ahead improved considerably as consumer assurance that the recovery will sustain increased. Reports further showed over 40% of the survey takers believe that interest rates will increase and close to 35% think that stock prices will increase in the coming year.

Home price in 20 cities slowed as a fall in sales raised concerns about the slump in the housing market. The S&P/Case-Shiller 20 city index fell by 0.8%, worse than the 0.4% fall expected. This follows an upwardly revised drop of 0.5% in August. On a year-over-year basis, the index increased 0.6%, the slowest gain in 8 months.  Of the twenty cities that are weighted for these calculations, LA and New York comprise of about 35% of the index.

Home price index for the third quarter fell to 135.48, from an upwardly revised reading of 138.29 for the second quarter. The index fell 2% since the last quarter and 1.5% on a yearly basis.

Interest Rates

Yields fell across the curve, lead by the front end of the curve, as short-termed Treasuries rallied more opposed to their longer-termed counterparts. The yield on the 2-Yr fell 6 basis points to 0.45%, while the 5-yr rallied to trade last at 1.46%, 4 bp below yesterday’s close. The benchmark 10-Yr note increased in price to push its yield 3 bp lower to 2.80%. Yield on the Long Bond fell 3 bp to end the month at 4.11%.

Inflation expectation, seen by the yield differential between the 10-Yr Treasury and inflation indexed securities with the same maturity, narrowed 2 basis points to 2.11%.

Across the Capital Markets

Stocks continued to fall for a third day today. The S&P ended 0.6% lower at 1180.55, while the NASDAQ index shed 1.1% to end at 2498.23. The VIX Volatility index gained 2 points to 23.54.

The dollar strengthened considerably as investors concerned about the euro, preferred the safer currency. The DXY index gained 0.7% to 81.325. The euro weakened more than a percent against the green back to 1.2983. The British Pound fell slightly to 1.5562.

Gold price increased 1.5% to 1386.02 while crude oil price slipped 2% to 84.11.

By Maulik Mody – Bondsquawk.com

November 30, 2010

Improving sentiments amidst the euro zone debt crisis and tension between the Koreas, the Institute of Supply Management – Chicago reported that businesses in the U.S. grew at a faster pace than expected. The Chicago Purchasing Manager Index increased to 62.5 during November, its highest level in seven months, from 60.6 in October. Economists had expected it to drop to a level of 59.9.

Manufacturing, that has played a key role in driving the recovery, will continue to expand as a weaker dollar boosts export demands and as capital investments by companies increase. The rise in the index was driven by a gain in production and new orders placed. Order backlogs decreased on better production. Inventories and supplier deliveries decreased during November, but increasing orders and production indicate that these will bounce back by next month.

Consumer confidence increased to a five-month high of 54.1 in November as sentiments about the recovery improved on better income and spending in recent times. This reading brings up the 3-month average slightly higher to 50.9. While the gauge for the present economic situation increased slightly, expectations going ahead improved considerably as consumer assurance that the recovery will sustain increased. Reports further showed over 40% of the survey takers believe that interest rates will increase and close to 35% think that stock prices will increase in the coming year.

Home price in 20 cities slowed as a fall in sales raised concerns about the slump in the housing market. The S&P/Case-Shiller 20 city index fell by 0.8%, worse than the 0.4% fall expected. This follows an upwardly revised drop of 0.5% in August. On a year-over-year basis, the index increased 0.6%, the slowest gain in 8 months.  Of the twenty cities that are weighted for these calculations, LA and New York comprise of about 35% of the index.

Home price index for the third quarter fell to 135.48, from an upwardly revised reading of 138.29 for the second quarter. The index fell 2% since the last quarter and 1.5% on a yearly basis.

Stocks were trading lower in the afternoon, with the S&P 0.4% lower to 1183.96. NASDAQ shed 0.9% and was last seen at 2503.62. Treasuries were rallying across the curve. The yield on the 10-Yr fell 4 bp to 2.78%, while that on the 2-Yr slumped 6 bp to 0.45%.

By Maulik Mody – Bondsquawk.com

November 29, 2010

Stocks fell early in the day on concerns that despite Ireland’s bailout by the EU and the IMF, the debt crisis might spread to other countries but pared most of their losses methods by day end. Treasuries rallied pushing yields lower, more so in the far end of the curve. Ireland’s bailout came with some relief for senior bondholders of Irish banks, who were spared the burden of sharing the cost of bailing. Both Ireland and Greece were given an extension to meet its target deficit and pay back the emergency funds.

Economic Data

Data released by the Dallas Federal Reserve showed that manufacturing activity in that region increased during November, its second consecutive rise. The index jumped to a seven month high of 16.2, from a level of 2.6 in October.

A rise in production and increase in new orders drove the rise in the index. Capacity utilization gauge of the index increased to 9.9 from a negative reading in Oct. Volume of shipments increased and delivery time improved, but inventories took a beating and fell to -7.1. Capital expenditure also increased this month.

Although improved, the six month average is still at -6.2 and a negative reading indicates a contraction of manufacturing activity. More readings are required in this area before it can indicate a recovery in manufacturing activity which is sustainable.

Interest Rates

Yields fell across the curve, lead by the further end of the curve. The Long Bond increased in price pushing its yield 7 bp lower to 4.14%. The benchmark 10-yr note yield fell 5 bp to 2.82%. The 5-yr also gained as its yield fell 3 bp to 1.50%. The front of the curve was flat as the yield on the 2-Yr was unchanged at 0.51%.

Inflation expectation, seen by the yield differential between the 10-Yr Treasury and inflation indexed securities with the same maturity, fell by a basis point to 2.13%.

Sovereign bonds performed mixed across the Atlantic. Germany’s 5-yr was unchanged at 1.77%. France’s 5-Yr bond fell as yields increased 3 bp to 2.06%. 5-Yr U.K. Gilts gained pushing its yield 3 bp lower to 2.01%.

Bonds were mostly lower among peripheral nations. The yield on the 5-Yr Portugal bonds increased 10 bp to 5.68%. Ireland’s bond fell slightly as its yield gained 2 bp to 2.25%. Italy’s 5-yr bond fell to push its yield 25 bp higher to 3.67%. Spain’s 5-yr yield increased 22 bp to 4.73%. Greece’s 5-yr bond was the only one to increase, as its yield fell 23 bp to 11.80%.

Across the Capital Markets

Stocks ended the day slightly lower. The S&P fell 0.1% to 1187.76, while NASDAQ ended 0.4% lower at 2525.22. The VIX Volatility index fell by a percent to 21.53.

The dollar strengthened as seen in the DXY index, which increased 0.6% to 80.836. Euro fell against the dollar to 1.3125. The cable also fell slightly to 1.5573.

Gold spot price gained slightly to 1366.32. Oil spot price also jumped higher to end at 85.89.

By Maulik Mody – Bondsquawk.com

November 28, 2010

The hard work of Ireland officials paid off as the 85 billion euro bailout for the country was approved yesterday by the European Union. Ireland is to receive 67.5 billion euro from the EU and the IMF and 17.5 billion from its own pension reserve, decided European finance ministers as they struggled to put a check on Ireland’s debt crisis at their earliest and prevent it from spreading to the next perceived targets, Spain and Portugal.

But the rescue package has not mitigated concerns that the contagion effect of the crisis is contained and will not affect other peripheral nations. As a result, Ireland’s bond yields pushed higher today while stocks and the euro declined. Spain and Portugal sovereign CDS rose to a record high. The cost of insuring against default by Spain rose to 322.75 basis points, while that against Portugal jumped to 501.98.

It was also decided that senior bondholders of Irish banks will not have to share the cost of the bailout, causing these bonds to rise after the announcement. While senior bondholders were decided to be spared, holders of subordinated debt were not too lucky as they are to share some of the burden of the cost. After witnessing the collapse of the banking systems of Greece and Ireland, Germany sought for permanent measures by the end of 2013 that would enable distressed nations to restructure their debts.

Along with the bailout, Ireland was given a year’s extension by the European Union to get its budget deficit to the target level of 3% of GDP. Greece was also given an extension of four years to repay the financial aid of 110 billion euro, to match the seven year timeline with Ireland. To ease concerns about the Ireland crisis spreading, officials from Spain and Portugal assured that they will not need financial aid, at least not immediately.

However, these statements failed to ease concerns in the markets. Stocks were trading lower in the morning, with the S&P shedding 1% to 1176.60. Dow Jones retreated 1.25% to 10953.80. Treasuries gained as investors parked funds in safer government bonds. Yield on the benchmark 10-Yr note fell 4 bp to 2.83%. The Long Bond also rallied pushing yield 3 bp lower to 4.18%.

November 26, 2010

Stock markets reversed their gains and Treasury prices increased as concerns about Ireland sovereign debt crisis widened. Ireland officials were keen on finalizing the financial aid before markets open next week and contemplated sharing the cost of the financial bailout with bondholders of the country’s big banks. As a result, bonds of Allied Irish slumped over 5% and Bank of Ireland’s bonds fell 4.8% before the weekend.

Interest Rates

Treasury rates fell across the curve as investors sought the safety of US government debt after concerns about Ireland mounted. The benchmark 10-Yr note rallied and traded last 4 bp lower at 2.87%. The Long Bond rallied the most as yields fell 7 bp to 4.21%. The belly of the curve flattened as the 5-Yr yield fell 4 bp to 1.53%. The 2-Yr bond gained to push its yield 2 bp lower to 0.51%.

Inflation expectations, as seen in the yield differential between the 10-Yr Treasuries and the 10-Yr TIPS, narrowed by a basis point to 2.14%.

Yields fell among developed nations across the Atlantic. 5-Yr German Bunds gained as yields fell 2 bp to 1.77%. France’s 5-Yr bond traded flat at 2.03%. Yields on 5-yr U.K. Gilts fell 2 bp to 2.03%.

Increasing concerns about Ireland pushed yields on its 5-Yr bonds to 8.23%, 4 bp higher than yesterday. Portugal’s bond gained as its yield fell 20 bp to 5.58%. Italy’s bond yield increased 2 bp to 3.42%. Spains’ 5-Yr bond fell slightly and pushed its yield a basis point higher to 4.52%.

Across the Capital Markets

Stocks erased some of its losses from before thanksgiving. The S&P lost 0.75% in half a day’s trading to 1189.40. NASDAQ retreated 0.3% to 2534.56. The VIX Volatility increased more than 3% to 22.22.

The dollar strengthened as seen by the DXY index which advanced 0.5% to 80.382. Euro weakened amidst concerns of the Ireland crisis spreading to other peripheral nations and traded last at 1.3242 against the dollar. Gold price fell $11.60 to 1363.65.

By Maulik Mody – Bondsquawk.com

November 24, 2010

As the Prime Minister of Ireland had promised earlier this week, the country came up with their plans to cut deficit and make changes to its banking system just before accepting the financial rescue package put together by the European Union and the International Monetary Fund.

Ireland aims to narrow the budget deficit to 3% of its GDP by the end of 2014, and this will be achieved by cutting government spending and increasing taxes. The country plans welfare cuts of 2.8 billion euro and collecting increased income taxes of 1.9 billion euro. Talks of a 85 billion euro package are active and may conclude as soon as by next week. Irish bonds suffered as the country’s credit was downgraded two levels yesterday by S&P on concerns that the cost of bailing out its banks might hike.

Ireland’s 5-Yr bond took a beating as its yields climbed 41 bp to 8.06%. The yield on benchmark 10-Yr bonds followed suit to 8.65%. Portugal’s 10-yr bond also fell as its yield climbed 6 bp to 6.80%. Spain’s and Greece’s bond fell and traded last at 5.03% and 11.74% respectively.

Treasury Rates

Treasuries collapsed as investors rejoiced on improved economic data and geared up for thanksgiving. The benchmark bond fell to push its yield 14 bp higher to 2.91%. The belly of the curve steepened as the 5-Yr yield gained 14 bp to 1.56%. The Long Bond traded last at 4.28%, 10 bp higher than yesterday. The 2-Yr also declined as its yield gained 8 bp to 0.53%.

Inflation expectation, as seen by the yield differential between the 10-Yr treasury and an inflation indexed bond having the same maturity (TIPS), widened 5 bp to 2.15%.

Across The Capital Markets

Stocks rallied and erased losses that resulted from concerns about tension between North and South Korea yesterday. NASDAQ gained 1.9% to end at 2543.12. The S&P increased 1.5% to 1198.35. The VIX Volatility index fell about 1% to 19.53

The DXY index continued to rally as the dollar strengthened and ended at 79.789.Euro weakened against the dollar to 1.3331. The British Pound was flat against the dollar at 1.5776.

Gold spot price fell slightly to 1374.15. Crude oil advanced over 3% to 84.11

By Maulik Mody – Bondsquawk.com

November 24, 2010

The Labor Department reported that the number of people filing for jobless claims for the week ended Nov 20 fell to its lowest level over two years. Initial jobless claims fell 32,000 to 407K, beating expectations of a fall to 435K. This reading brings the 4-week moving average from 443.5K down to 436K. Although jobless claims are improving lately, it is still increasing on a non-seasonal basis due to job cuts in the construction industry. But economists believe these layoffs are smaller than usual owing to the decimation in the industry, and job reports for November will be improved due to strong private sector hiring.

Consumer spending increased for a fifth month in October, lead by an increase in personal income, which improved 0.5% in October. Personal spending increased 0.4% last month, after a 0.3% gain the prior month. The recent increase in jobs and household income may instill confidence in consumers to spend during the holidays. Although simultaneous increase in spending and incomes makes some analysts believe that the recovery may be speeding, it might be a result of the holiday season closing in. Consistent improvement in this area is required for a longer time before its effect on the recovery can be gauged.

The Commerce Department released reports showing that demand for durable goods dropped 3.3% in October. The fall in orders for long term goods threaten to reduce business investments in capital equipment, which will hurt the economy, especially as spending rises slowly but steadily. Demand for these goods for the month before was revised up to an increase of 5% after a previously reported 3.3%.  This makes the fall in October the biggest plunge since 2009.

The demand for capital goods also suffered, falling 6.6% in October after an increase of 11.7% the month before. Non defense good orders fell 4.5%. Commercial aircrafts also faced reduced demand last month, after sales more than during the previous month.

Among other independent releases, mortgage applications for the week ended Nov 19 increased 2.1%, following a 14.4% decrease the previous week. Purchases surprisingly jumped 14.4%, while refinancing decreased by 1%. The 30-Yr fixed rate mortgage increased slightly to 4.50%, which is still near record low levels, making this a good time to purchases homes.

The University of Michigan Confidence index improved 2.3 points to 71.6 in November, its highest level since June. Economists had projected it to increase slightly to 69.5. The gauge for economic conditions increased 2.4 points to 82.1, while economic outlook also increased 2.1 points to 64.8.

New home sales declined 8.1% to 283K during October, as opposed to economic expectations of an increase to 312K. Although consumer spending and income in increasing, it is not strong enough to sustain the recovery in the housing markets despite low mortgage rates. Sales increased by 5000 in the South, but major decline in the West and Midwest regions drove the numbers lower.

Investors were optimistic ahead of thanksgiving. Stocks erased much of their losses since yesterday. The S&P was 1.2% higher at 1194.30 as of 11:52 AM EST. NASDAQ gained 1.8% to 2539.84. Treasuries fell across the curve. The 10-Yr fell pushing its yield 11 bp higher to 2.88%. The 2-Yr yield rallied 5 basis points to 0.51%. The Long Bond last traded 6 bp higher at 4.25%.

By Maulik Mody – Bondsquawk.com

November 23, 2010

Stocks fell across US and Asia and Treasuries inched higher, even as the Commerce Department reported that the US GDP grew at an annual rate of 2.5% during the third quarter, higher than previously reported. Yields were driven lower on North Korea’s attack on South Korea over dispute over military activities.

Economic Data

The Commerce Department revised third quarter economic growth in the US to 2.5% from the previously reported 2.0% last month. Consumer spending, which forms close to 70% of the economy, increased by 2.8% as opposed to the previously reported 2.8%. Reports released also showed that wages and salaries increased more than twice as previously estimated, indicating that the job market may be headed towards stabilization. The GDP price index and the core index, which is used by the Fed to gauge inflation, remained unchanged from previous estimates.

Existing home sales for October decreased to a 4.43 million annual rate, as compared to 4.53 million in September. Economists had expected it to fall to 4.48 million, which was half the 2.2% decline seen in October. The Richmond Fed manufacturing index jumped to 9 in November from 5 in the previous month. The index beat economists’ expectations of 6, mainly as shipments and capacity utilization increased from the previous month. The average work week component of the index jumped from zero to 9, while order backlogs, albeit negative, improved considerably.

Interest Rates

Yields fell slightly across the curve. The benchmark bond rallied as its yield fell 2 bp to 2.78%. The Long Bond inched higher as its yield declined a basis point to 4.195%. The belly flattened slightly as the 50Yr yield declined 2 bp to 1.40%. The 2-Yr last traded 2 basis points lower at .45%.

Inflation expectation, as seen by the yield differential between the 10-Yr treasury and an inflation indexed bond having the same maturity (TIPS), narrowed 3 bp to 2.10%.

Yields continued to fall among developed nations across the Atlantic. 5-Yr German Bunds gained pushing its yield 11 bp lower to 1.65%. The yield on the 5-yr French bond fell 6 bp to 1.90%. 5-Yr U.K. Gilts rallied to push its yield 8 bp lower to 1.96%.

Bonds performed mixed among the peripherals.  Greece’s 5-Yr bond fell for another day pushing yields 6 bp higher to 12.28%. Ireland’s bond erased its gains from yesterday and fell to push its yield 56 bp to 7.65%. Spain’s bond ended 18 bp higher at 4.22%. Portugal’s 5-Yr bond lost more than it gained yesterday pushing its yield 27 bp to 5.70%.

Across the Capital Markets

The US stock market collapsed after North Korea fired rockets at its southern neighbor, raising concerns about the small South Korean island. The S&P ended 1.4% lower to 1180.73. NASDAQ erased its losses from yesterday to 2494.95. The VIX volatility index increased for a second day to 20.63.

The DXY index, which measures the performance of the dollar against six currencies across the world, increased as investors flocked to a safer currency, closing at 79.681. Euro weakened about 2% to the dollar to 1.3367. The cable (GBP/USD) fell 1.1% to 1.5775.

Commodity prices rose along with the dollar. Gold spot price increased to 1376.40. Oil price fell to 81.25.

By Maulik Mody – Bondsquawk.com

November 22, 2010

Markets saw an eventful day as the FBI raided the offices of two hedge funds in investigation of insider-trading. Also, as Ireland came close to its financial bailout, stocks, the euro and commodities slid in price as it failed to contain concerns about its contagion effect on other nations. As a result, stocks were lower and Treasuries rallied across the curve. Investors bought Treasuries and sold off stock ahead of the approaching holidays, not risking holding positions in risky assets for the long weekend.

Economic Data

According to a report released by the Federal Reserve Bank of Chicago, economic activity grew in Chicago, although at a slow pace. The Chicago Fed national index came in negative 0.28 in October, as opposed to negative 0.52 in the prior month. The index is derived from 85 economic indicators, and a reading below 0 indicates below-trend growth in the economy. Although the reading improved for October, it pulled the 3-month moving average down to negative 0.46.

Important economic releases to watch out for this week before the holiday kicks in include third quarter GDP growth, home sales and a lot of consumer data, including confidence, income and spending.

Interest Rates

Yields fell across the curve as investors Ireland’s financial bailout raised other concerns about the euro zone debt crisis. The benchmark 10-yr note rallied as its yield slipped 7 bp to 2.80%. The belly of the curve gained the most as yield on the 5-Yr collapsed 10 bp to 1.42%. The 2-Yr bond last traded 4 bp lower at a yield of 0.46%. The Long Bond gained moderately as its yield fell 4 bp to 4.21%.

Inflation expectation, as seen by the yield differential between the 10-Yr treasury and an inflation indexed bond having the same maturity (TIPS), remained flat at 2.13%.

Yields were broadly lower across the Atlantic. 5-Yr German Bunds traded 6 bp lower at 1.76%. 5-yr France yield fell 7 bp to 1.96%. 5-Yr U.K. Gilts rallied to push its yield 6 bp lower to 2.03%.

Bonds performed mixed among the peripherals.  Greece’s 5-Yr bond fell pushing yields 28 bp higher to 12.22%. Ireland’s bond gained slightly as its yield fell 4 bp to 7.08%. Spain’s bond ended 5 bp higher at 4.04%. Portugal’s 5-Yr bond gained as its yield fell 9 bp to 5.42%.

Across the Capital Markets

Stocks performed mixed amidst FBI’s raids of hedge funds and Ireland’s rescue concerns. The S&P ended 0.2% lower to 1197.84. NASDAQ gained half a percent to 2532.02. The VIX volatility index increased about 2% to 18.37.

The DXY index, which measures the performance of the dollar against six currencies across the world, gained slightly to 78.621. Euro weakened slightly against the dollar to 1.3627. the cable (GBP/USD) fell slightly to 1.5957.

Gold prices increased to 1366.45. Oil price weakened slightly to 81.74.

By Maulik Mody – Bondsquawk.com

November 22, 2010

As Ireland comes close to accepting financial aid, set up by the European Union and the International Monetary Fund, other concerns about the stressed Euro zone have started to surface. Analysts estimate that the rescue package will be close to 100 billion euro, which comprises of about 60 billion needed by the Irish government and 35 billion to support its banks. But two things that weigh on investor’s minds is whether this financial aid will help Ireland come out of its structural and political issues, and the possibility of the Ireland fiasco having a contagion effect on the other nations queued up.

Irish bond and CDS markets suggest that the bailout for Ireland was inevitable, but whether this will work is questionable. The finance minister said Irish banks became a threat to the entire euro zone by the amount of risk they took, and highlighted that they will be downsized and made to focus on consumers and businesses. Ireland also plans to perform stress tests on banks. Besides the financial crisis, investors are also concerned about the political climate of the nation as Green Party said it will pull out of Ireland’s Prime Minister’s coalition. Ireland is planning the government’s four year budget, which will chalk out plans to cut government deficit and restructure the banking system.

Plans to cut deficits and restructure debt will not prove as a solution that Ireland, and the euro zone in general, faces. Soon after the Greek banking system had started wobbling, a contagion effect was seen to affect other peripheral nations including Ireland and Portugal. Only a few months after Greece accepted the rescue aid, analysts increased the time that the country would need to pay back the funds to the IMF and also speculated another possible debt restructuring. This makes me wonder how Ireland will prove to be different and actually benefit from the financial aid.

Ireland’s banking system has shown that its three big banks had total liabilities that matched 200% of its GDP. The first step for Ireland and other peripheral nations that face similar problems would be to break down these banks to mid-sized banks that can be better regulated and managed. Portugal’s 10-Yr yield which is now close to 6.75% suggests that it might be next, but this may not be due to a crisis in the banking system. In Portugal’s case, debt problems have surfaced since its growth has been slow as opposed to others. This is due to the economy’s incompetency and poor management as compared to others. The slight relief however, would be that the cost of bailing out Portugal may be less than half the cost of bailing Ireland, or less than 50 billion euro.