BondSquawk

By Maulik Mody – Bondsquawk.com

November 19, 2010

Stocks reversed their losses from earlier in the day and ended higher but did not move much this week. Markets were mainly driven by Ireland’s debt issues and talks about its bailout package, manufacturing activity in the U.S. and steps taken by China to keep inflation under control. Treasuries rallied early today but shed some of their gains, falling in the front end of the curve. The longer termed Treasuries retained their gains today but ended the week lower.

Interest Rates

Yields climbed slightly in the front end of the curve and fell in the longer end of the spectrum. The benchmark bond rallied as yields fell 2 bp to 2.87%. The Long Bond rallied the most as yields fell 4 bp to 4.24%. The belly of the curve widened slightly, as yield on the 5-Yr gained 2 bp to 1.51%. The 2-yr fell as its yield pushed a basis point higher to 0.505%.

Inflation expectations, as seen by the difference in yields of the 10-yr Treasury and 10-Yr inflation indexed bond (TIPS), widened 2 basis points to 2.13%.

Yields broadly fell across the Atlantic. Germany’s 5-Yr Bunds gained slightly pushing its yield a basis point lower to 1.82%. France’s 5-Yr bond yield fell 2 bp to 2.03%.5-Yr UK Gilts rallied as its yield slid 5 bp lower to 2.09%.

Bonds gained among peripheral nations too. Greece’s bond yield fell 3 bp to 11.94%. Portugal’s bond fell amidst its growing deficit concerns, pushing the 5-Yr yield 8 bp higher to 5.52%. Spain’s 5-yr bond yield slipped 2 bp to 3.99%. Italy’s 5-Yr rallied the most as yield fell 6 bp to 3.29%. Ireland’s 5-Yr bond gained as investors grew confident that the Ireland will accept a bailout package by the IMF, pushing its yield 4 bp lower to 7.12%.

Across the Capital Markets

Stocks ended the day slightly higher even as China announced to increase interest rates to control inflation. The S&P rallied 0.25% to 1199.73. NASDAQ advanced 0.2% to 2518.12. The VIX Volatility index ended slightly lower at 18.04.

The DXY index, which gauges the dollar against six major currencies across the world, fell slightly to 78.480. Euro gained 0.3% against the dollar to 1.3673, while the British pound weakened 0.4% to 1.5979.

Gold ended the day slightly lower at 1352.93. Crude oil price weakened 0.5% to 82.05.

November 19, 2010

Ireland’s Sovereign CDS it off its highs as the country is expected to accept a rescue package by the European Union and the International Monetary Fund. The cost of insuring Ireland sovereign debt fell from 600 basis points earlier this month and is now near 515 bps.

However, such a temporary fall was also seen in Greece CDS during the talks of its bailout and after it accepted the package. Today, however, its CDS is close to its highs it had reached during the crisis.

Clearly, Portugal is next.

November 19, 2010

The risk of TIPS is evident by the recent bounce in the breakeven rates. The breakeven for a Treasury is the difference between its yield and the yield of a TIPS security having similar maturity. The breakevens of 5-Yr and 10-Yr continued to widen yesterday, ending around 5 basis points wider.  The 20-Yr breakevens ended about 3 bp wider.

This increase in breakevens seems to be driven by a big rebound in risky assets, viz. stocks, energy, commodities and gold.  Below is a graph of the 5-Yr breakeven and its 50-day moving average. It clearly shows the 5-Yr breakeven bouncing off the 50day.

According to a TIPS trader, dealers currently do not have many long positions in TIPS. This, combined with the risk rebounding suggests that the breakevens might trade well in the coming days.

By Maulik Mody – Bondsquawk.com

November 18, 2010

Fueling the early rally in stocks besides talks of Ireland bailout was the Philadelphia Fed’s reports which showed that manufacturing in that region expanded much more than forecasted in November. The Federal Reserve of Philadelphia’s general economic index jumped from 1.0 in October to 22.5 this month, its highest level this year. Economists had forecasted a rise to 5.0 this month. Readings above zero indicate an expansion in manufacturing activity. The reports come in as a surprise especially since manufacturing in New York region was reported to have contracted earlier this week.

The rise in the index was mainly a result of a jump in new orders and shipments. New orders hiked to 10.4 after being negative last month. Shipments increased to 16.8 from 1.4 in October. Prices paid component also increased slightly to 34.0. The gauge for the number of employees also increased to 13.3 from 2.4 last month. All components of the index showed improvement this month. “The survey’s index for future prices showed continued increases this month” the report said.

The Labor Department reported that the number of workers filing for unemployment was lesser than expected in the week ended Nov 13. Initial jobless claims increased 4K to 439K, but missed estimated of an increase to 441K according to the reports released in Washington. Although lower than expected, jobless numbers remain relatively high and do not indicate any improvement in the job market. This reading pulls down the 4-week moving average to 443K, which is still way above tolerable levels. The number of citizens who continued to file jobless claims decreased 6000 to 4295K, in line with expectations.

Among other releases, The Conference Board’s leading index gained 0.5% for a second month in October. The index is a gauge of the leading economic indicators in the US. Some contributors to the leading index include jobless claims, consumer goods orders, building permits, stock prices and M2 money supply etc.

Stocks retained gains as investors were optimist that Ireland was close to accepting the bailout. As a result, the Euro strengthened and commodity prices gained. The S&P gained 1.7% and was just shy of reaching 1200. NASDAQ gained 1.9% and was last seen at 2522. Treasury yields rose on eased concerns of the Irish economy and on improved manufacturing reports. The benchmark 10-Yr note gained 6 bp to 2.94%. The 5-Yr fell the most as its yield increased 7 bp to 1.54%.

By Maulik Mody – Bondsquawk.com

November 17, 2010

Stocks advanced slightly erasing some of its losses since yesterday while Treasuries fell in the further end of the curve. Commodity prices rose while the dollar weakened as concerns about the Ireland debt crisis drove the markets.

Economic Data

Following yesterday’s release of cooling wholesale prices, the Labor Department reported today that consumer prices gained less than forecast in October. The cost of living in the U.S., as seen by the Consumer Price Index, gained 0.2% following a 0.1% increase the previous month, missing economists’ forecasts of 0.3%. Consumer prices during the 12 months ended October increased by 1.2%.

The rise in commodities prices failed to cause a proportional rise in consumer goods and services. The core CPI index, which excludes the usually volatile food and energy prices and is used by the Fed to gauge inflationary pressure, was unchanged for a third straight month. On a year over year basis, the index gained 0.6%, said to be its lowest gain in history. The Federal Reserve may have faced opposition for its decision of further quantitative easing, but these numbers justify the Fed’s act and Bernanke’s concerns of deflation.

Construction began on lesser than expected homes in October, as reported by the Commerce Department. Housing starts fell by 11.7% to an annual rate of 519K following a downward revised reading of 588K. Building permits increased 0.5% after falling 4.2% the prior month. High unemployment rate and reduced household wealth is constraining home buyers despite low mortgage rates. Mortgage applications for the week ended Nov 12 fell 14.4%, the biggest plunge this year. While purchases fell 5.0%, refinancing fell 16.5%. The drop in refinancing may be in part due to a slight increase in the 30-Yr mortgage rate, which was at 4.46% as opposed to 4.28% the prior week.

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

Interest Rates

The benchmark note fell as yield gained 4 bp to 2.88%. The Long Bond fell slightly, pushing its yield 2 bp higher to 4.26%. The belly of the curve was mostly unchanged, as yield on the 5-Yr fell a basis point to 1.46%. The front end of the curve fell as the yield on the 2-Yr declined 2 bp to 0.48%.

Inflation expectations, as seen by the yield differential between the 10-YR Treasury and 10-Yr TIPS, widened 6 bp to 2.08%.

Sovereign bonds gained across the Atlantic. France’s 5-Yr bond advanced to push its yield a basis point lower to 1.96%. 5-Yr UK Gilts fell 2 bp to 2.02%. Yield on Portugal’s 5-Yr fell 23 bp 5.20%. Spain’s benchmark bond fell to push its yield 3 bp higher to 3.87%. Greece’s 5-Yr bond advanced and traded last at 12.15%, 18 bp lower.

Across The Capital Markets

Stocks posted slight gains to pare some of their losses from yesterday. NASDAQ advanced a quarter of a percent to 2476.01, while the S&P hardly changed to end at 1178.59. The VIX Volatility index ended lower at 21.76.

The DXY dollar index, which measures the dollar against six major currencies across the world, fell to 79.084. The Euro strengthened against the greenback to 1.3529. The cable (GBP/USD) advanced 0.1% to 1.5907.

Gold spot price fell about $3 to 1336.0. Crude oil prices fell 2.5% to 80.44.

By Maulik Mody – Bondsquawk.com

November 17, 2010

Following yesterday’s release of cooling wholesale prices, the Labor Department reported today that consumer prices gained less than forecast in October. The cost of living in the U.S., as seen by the Consumer Price Index, gained 0.2% following a 0.1% increase the previous month, missing economists’ forecasts of 0.3%. Consumer prices during the 12 months ended October increased by 1.2%.

The rise in commodities prices failed to cause a proportional rise in consumer goods and services. The core CPI index, which excludes the usually volatile food and energy prices and is used by the Fed to gauge inflationary pressure, was unchanged for a third straight month. On a year over year basis, the index gained 0.6%, said to be its lowest gain in history. The Federal Reserve may have faced opposition for its decision of further quantitative easing, but these numbers justify the Fed’s act and Bernanke’s concerns of deflation.

Digging further into the numbers, energy prices increased 2.6%, the most in four months. The cost of services and housing gained 0.1%. Transportation costs increased 1.2%, owing mainly to the 4.6% increase in the price of gasoline. Commodity prices increased by half a percent. Tobacco and clothing prices fell 0.3%

Construction began on lesser than expected homes in October, as reported by the Commerce Department. Housing starts fell by 11.7% to an annual rate of 519K following a downward revised reading of 588K. Building permits increased 0.5% after falling 4.2% the prior month. High unemployment rate and reduced household wealth is constraining home buyers despite low mortgage rates. Mortgage applications for the week ended Nov 12 fell 14.4%, the biggest plunge this year. While purchases fell 5.0%, refinancing fell 16.5%. The drop in refinancing may be in part due to a slight increase in the 30-Yr mortgage rate, which was at 4.46% as opposed to 4.28% the prior week.

The report showed that while single family home starts decreased 1.1% in October, multi-family starts plunged by 43.5%. On a year over year basis, housing starts declined by 1.9%. Cooling inflationary pressures and slowly growing personal income, along with high unemployment rate will slow the recovery of the housing market, which forms the highest percentage of personal wealth for individuals.

Stocks were trading slightly higher in the morning. The S&P was last seen 0.1% above yesterday’s close at 1180, while NASDAQ advanced 0.3% to 2477. Treasuries rose on news that talks about aid to Ireland will start by tomorrow. The 10-Yr was trading 2 bp lower at 2.82%. The 2-Yr was also 2 bp lower at 0.48%.

By  Maulik Mody – Bondsquawk.com

November 16, 2010

Stocks collapsed and commodity prices slid as concerns about the debt crisis in Ireland mounted. Also pushing stocks lower was talks that China will take action to slow its economy and contain inflation. As a result, Treasuries reversed their losses and rallied, pushing yields lower.

Economic Data

Wholesale prices showed a moderate than forecast increase in October, indicating that slowing demand is resulting in a cooling of inflation pressures, raising concerns for the Federal Reserve. The producer price index gained by 0.4%, missing economist estimates of 0.8%. The core index, which excludes volatile food and energy prices and is used to judge inflation, decreased 0.6% from a 0.1% increase in September.

Prices were lower as a result of a decline in price of capital equipment, including computers and light motor trucks. Food prices declined 0.1% in October while energy prices increased 3.7%. The index excluding food prices only increased 0.6%, as seen in the report by the Labor Department. As demand remains weak, companies are unable to raise prices to fight higher commodity prices. These concerns underscore the Federal Reserve’s decision to initiate another round of quantitative easing, to avoid a deflationary environment.

The industrial production and capacity utilization report for October by the Federal Reserve showed that manufacturing activity increased by 0.5% in October, the most in three months, following a 0.1% gain in September. Production of motor vehicles and parts increased by 1.6%, while machinery manufacturing increased by 1.4%. A decrease of 3.4% in utilities however caused overall industrial production to remain flat. Capacity utilization was unchanged at 74.85.

In another independent data release, The Treasury Department reported that the net purchase of US securities by foreign investors decreased during September. The net amount of long-term securities purchased totaled $81 billion in September, down from $128.7 billion in August. Including short term securities, total securities purchased totaled $81.7 billion, compared to the downward revised $11.2 billion during August.

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

Interest Rates

Treasuries erased their losses on concerns about the ongoing debt crisis in Ireland and Greece and China’s steps towards curbing inflation, thereby threatening global economic growth.

The benchmark bond pared some of its losses from yesterday as its yield fell 12 bp to 2.84%. The Long Bond also rallied pushing its yield 15 bp lower to 4.265%. The belly of the curve flattened as the 50Yr traded last at 1.46%, 6 bp lower than yesterday. The 2-Yr bond gained as its yield fell 4 bp to 0.50%.

Inflation expectations, as seen by the yield differential between the 10-Yr Treasury and 10-Yr inflation-indexed securities (TIPS), narrowed 7 bp to at 2.02%.

Yields were higher across the Atlantic. Yield on Germany’s 5-Yr Bunds increased 4 bp to 1.72%. France’s 5-Yr bond fell as its yield pushed 5 bp higher to 1.97%. 5-Yr UK Gilts were unchanged at 2.04%.

Yields were higher across the peripherals as bonds of these nations rallied. Portugal’s 5-Yr bonds fell as its yield pushed 4 bp higher to 5.43%. Italy’s 5-Yr bond fell, pushing its yield 7 bp higher to 3.26%. Spain’s bond fell too, pushing its yield 9 bp higher to 3.83%. Greece’s bond collapsed as its yield hiked 41 bp to 12.33%.

Across the Capital Markets

Stocks continued to decline on global economic concerns. The S&P ended the day 1.6% lower at 1178.34. NASDAQ fell 1.7% to 3469.84. The VIX Volatility index gained 2.38 points to 22.58.

The dollar gained as seen in the DXY index, which climbed to 79.21. Euro fell against the dollar to 1.3489. The British Pound fell to 1.5884.

Gold spot price fell to 1339.70. Crude oil price fell to 82.34.

By Maulik Mody – Bondsquawk.com

November 16, 2010

Wholesale prices showed a moderate than forecast increase in October, indicating that slowing demand is resulting in a cooling of inflation pressures, raising concerns for the Federal Reserve. The producer price index gained by 0.4%, missing economist estimates of 0.8%. The core index, which excludes volatile food and energy prices and is used to judge inflation, decreased 0.6% from a 0.1% increase in September.

Prices were lower as a result of a decline in price of capital equipment, including computers and light motor trucks. Food prices declined 0.1% in October while energy prices increased 3.7%. The index excluding food prices only increased 0.6%, as seen in the report by the Labor Department. As demand remains weak, companies are unable to raise prices to fight higher commodity prices. These concerns underscore the Federal Reserve’s decision to initiate another round of quantitative easing, to avoid a deflationary environment.

The industrial production and capacity utilization report for October by the Federal Reserve showed that manufacturing activity increased by 0.5% in October, the most in three months, following a 0.1% gain in September. Production of motor vehicles and parts increased by 1.6%, while machinery manufacturing increased by 1.4%. A decrease of 3.4% in utilities however caused overall industrial production to remain flat. Capacity utilization was unchanged at 74.85.

Increased factory production is a good sign, but many more improved readings are needed in this zone for it to boost the recovery. Total factory production excluding vehicles increased 0.5%, the most in five months. Durables production increased 0.8% in October after a 0.5% decrease the prior month. Energy production fell 1.5% after a 0.9% drop in September.

In another independent data release, The Treasury Department reported that the net purchase of US securities by foreign investors decreased during September. The net amount of long-term securities purchased totaled $81 billion in September, down from $128.7 billion in August. Including short term securities, total securities purchased totaled $81.7 billion, compared to the downward revised $11.2 billion during August.

Reports from the National Association of Home Builders showed that confidence among home builders increased for a second month in November. Housing Market Index increased to a five month high of 16 in November from 15 in the previous month. This slight gain however does not indicate a recovery in the housing markets as demand remains weak due to a high unemployment rate.

Stocks extended their losses and were trading at least 1.5% lower since yesterday. The S&P retreated 1.5% and was last seen at 1179. NASDAQ fell 1.7% and was at 2471 before noon. Treasuries reversed some of their losses from yesterday. The 10-Yr gained pushing its yield 2 bp lower to 2.94%. The yield on the Long Bond reversed and fell 4 bp to 4.38%.

By Maulik Mody – Bondsquawk.com

November 15, 2010

Stocks declined slightly and Treasuries collapsed on concerns of inflation. Advanced retail sales and increased business inventories reported today also caused Treasuries to sell off, pushing yields higher. The 30-yr yield reached its highest levels since May. Gold & oil declined slightly, while the dollar advanced.

Economic Data

In an indication that consumer spending is bouncing back and leading the recovery, retail sales advanced 1.2% during October, beating economists’ forecasts of 0.7%. This has been the biggest increase since March this year and instills confidence in retailers right before the holiday season kicks in. Stock market gains and an improving job market may boost consumer spending in the months ahead.

Sales increased the most owing to strong demand for vehicles and parts. Auto sales increased 5.7% last month, up from 1.7% during September. Building material purchases increased 1.9%, while home furniture and electronics sales weakened. Excluding auto, retail sales increased by 0.4%, in line with economists’ forecasts. Excluding auto, gasoline and building materials, sales improved only 0.2%.

While retail sales may have improved, manufacturing activity in the New York region slowed as reported by the Federal Reserve Bank of New York. The Empire state index fell to negative 11.1 in November from 15.7 in October, ending in the negative territory for the first time in 15 months. A negative reading suggests contraction in manufacturing. The index fell mainly as orders dropped as demand for goods is not strong enough for manufacturers to increase production.

In a separate economic release, business inventories increased 0.9% in September, up from 0.6% the previous month and beating economists’ expectations of 0.8%. Manufacturer inventories increased 0.7% while that for retailers increased 0.8%. Wholesalers saw a 1.5% increase in goods stored for sale. Sales for manufacturers, retailers and wholesalers increased 0.4%, 0.8% and 0.4% respectively. The inventory to sales ratio was unchanged at 1.27%.

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

Interest Rates

Yields rose across the curve on today’s economic data and as the Fed faced opposition against its asset purchase program, pointing that the Fed risks a surge in inflation by purchasing more assets.

The yield on the benchmark 10-Yr note gained 17 bp to 2.96%, its biggest one-day jump this year. The belly of the curve widened as the 5-Yr yield increased 16 bp to 1.53%. The Long Bond fell on opposition to the Fed’s asset purchases, pushing its yield 13 bp higher to 4.415%. The front end of the curve gained as the yield on the 2-Yr ended 3 bp higher to 0.54%.

Inflation expectations, as seen by the yield differential between the 10-Yr Treasury and 10-Yr inflation-indexed securities (TIPS), remained unchanged at 2.08%.

Yields were higher among developed nations across the Atlantic. Yield on Germany’s 5-Yr Bunds increased 4 bp to 1.68%. France’s 5-Yr bond fell as its yield pushed 3 bp higher to 1.92%. 5-Yr UK Gilts last traded 6 bp higher at 2.04%.

Yields were lower across the peripherals as bonds of these nations rallied. Portugal’s 5-Yr bonds gained as its yield fell 10 bp to 5.39%. Italy’s 5-Yr bond gained slightly as its yield fell 2 bp to 3.19%. Spain’s bond gained pushing its yield 4 bp lower to 3.74%. Greece’s bond gained the most as yield fell 30 bp to 11.92%.

Across the Capital Markets

Stocks declined as companies such as Pulte Group Inc, Amazon.com etc fell about 3%. The S&P weakened 0.1% to 1197.75. NASDAQ fell 02% to 2513.82. The VIX Volatility index fell close to 25 to 20.20.

The dollar gained as seen in the DXY index, which gained to 78.618. Euro weakened 0.8% against the dollar to 1.3587. The British Pound fell 0.4% to 1.6053.

Gold spot price fell about $8 to 1360.60. Crude oil price fell $3 to 84.88.

By Maulik Mody – Bondsquawk.com

November 15, 2010

In an indication that consumer spending is bouncing back and leading the recovery, retail sales advanced 1.2% during October, beating economists’ forecasts of 0.7%. This has been the biggest increase since March this year and instills confidence in retailers right before the holiday season kicks in. Stock market gains and an improving job market may boost consumer spending in the months ahead.

Sales increased the most owing to strong demand for vehicles and parts. Auto sales increased 5.7% last month, up from 1.7% during September. Building material purchases increased 1.9%, while home furniture and electronics sales weakened. Excluding auto, retail sales increased by 0.4%, in line with economists’ forecasts. Excluding auto, gasoline and building materials, sales improved only 0.2%.

While retail sales may have improved, manufacturing activity in the New York region slowed as reported by the Federal Reserve Bank of New York. The Empire state index fell to negative 11.1 in November from 15.7 in October, ending in the negative territory for the first time in 15 months. A negative reading suggests contraction in manufacturing. The index fell mainly as orders dropped as demand for goods is not strong enough for manufacturers to increase production.

The reading for new factory orders fell to -24.4 from 12.9 last month. The index for Shipments fell to negative 6.1 from 19.4. Inventories increased to 0 from -11.7. None of the components of the index improved as compared to October. Only the prices paid component and number of employees read positive. Manufacturing comprises of 11% of the economy and has played a key role in driving the recovery so far.

Although the Fed’s recent asset purchase program is directed towards spurring growth and avoiding inflation, the slow growth in export orders will not be enough to boost factory expansion in the coming months. Economists eagerly await the Philadelphia Fed results to estimate how manufacturing fared across the country as reported by the Institute of Supply Management.

In a separate economic release, business inventories increased 0.9% in September, up from 0.6% the previous month and beating economists’ expectations of 0.8%. Manufacturer inventories increased 0.7% while that for retailers increased 0.8%. Wholesalers saw a 1.5% increase in goods stored for sale. Sales for manufacturers, retailers and wholesalers increased 0.4%, 0.8% and 0.4% respectively. The inventory to sales ratio was unchanged at 1.27%.

Stocks were broadly higher in morning trading. The S&P was last seen 0.1% higher at 1200, while Dow Jones was 0.2% improved as 11211. Treasuries fell even as Bloomberg reported that bond option price indicated that quantitative easing was effective even before it began. The yield on the benchmark 10-Yr note increased 5 bp to 2.84%, while that of the 5-Yr increased 7 bp to 1.44%.