Blog > BondSquawk

Economic/Bond Market Summary – March 29, 2010

by Rom Badilla, CFA – Bond Trader and BondSquawker

The yield on 5 and 7-year notes increased slightly by a basis point to end at 2.60 and 3.33 percent, respectively. The long end underperformed as the yield curve continues to steepen. The 10-year closed at 3.87 percent, a 2 basis point jump while the Long Bond moved higher by 2.5 basis points to end the day at 4.77 percent. The front end of the curve as indicated by the 2-year remained unchanged and closed at 1.04 percent.

The S&P500 improved slightly by rallying 0.6 percent to end at 1173.22. The Volatility Index aka VIX closed at 17.59, a decline of 1.0 percent.

The U.S. Dollar Index declined 0.4 percent while 10-year swap spreads increased by almost a basis point to close at -5 basis points.

Posted by John Adams on March 30, 2010 under BondSquawk
Tags: , , , , —

Bernanke: Low Interest Rates Still Needed for Struggling Economy

Federal Reserve open to selling securities.

Courtesy of Rom Badilla, CFA – Bond Trader

In a prepared testimony to the House Financial Services Committee, Ben Bernanke reiterated that the economy continues to need low interest rates and “accommodative monetary policies.” He also stated that both the labor markets and housing sector remain weak.

Furthermore, Bernanke also said that if necessary, the Fed has the option of selling securities from its balance sheet once the economic recovery and subsequent change in monetary policy is underway.  The balance sheet has grown to about $2.3 trillion from about $900 billion before the financial crisis.  The Fed’s portfolio originally contained Treasuries but expanded to include other securities such as Mortgage Backed Securities and U.S. Agency debt, in order to facilitate lower interest rates during the crisis.

Interestingly, the Fed’s program of Mortgage Backed Security purchases totaling $1.25 trillion will be completed at the end of the quarter.  While some market participants think this is a non-event, the Fed has been the biggest provider of liquidity in the secondary mortgage market.

This support has kept mortgage rates low and what’s left of the real estate industry on life support.  Despite tax incentive programs, the housing market is still very weak and any signs of a turnaround are far off.  With the weak Treasury auctions, sovereign risk still on the horizon, and the end of Federal sponsorship, interest rates could be poised to move higher. Higher interest rates could challenge the sustainability of the economic recovery and a double dip scenario may become a reality.

Equities were practically flat after rallying for most of the day as the S&P500 closed at 1165.73.  Interestingly, the Volatility Index aka VIX increased again signaling heightened investor uncertainty, to close at 18.40, a 4.8 percent increase from the prior session.

This recent rally appears to be in the late stages and is in overbought territory.  Profit taking into quarter end may drive the markets lower, especially if we hit into resistance near the 1200 level on the S&P.

Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of iTB Securities LLC or its employees.

Posted by John Adams on March 26, 2010 under BondSquawk,Fed Watching
Tags: , , —

Economic/Bond Market Summary – March 25, 2010

Courtesy of Rom Badilla, CFA – Bond Trader

European leaders agreed on an aid plan for Greece. The Franco-German led plan is for a mix of International Monetary Fund and bilateral loans, which would be triggered only if Greece runs out of fund-raising options.

While this provides some form of a backstop and eases concerns in the short term, sovereign risk and massive debt issues remain. Spain and Italy could be an issue in addition to Portugal whose debt was downgraded earlier this week by Moody’s to AA-, with possible further action down the road.

The U.S. Dollar Index, which measures the exchange rate against 6 major global currencies, rallied again by improving 0.4 percent on the day. 2-year Greece Bonds rallied off of today’s news as the yield tightened 36 basis points to 4.59 percent.

Yields jumped again after another weak showing of interest at the U.S. Treasury note auction. Today, the U.S. Treasury auctioned off $32 billion of 7-year notes, capping off a total of $118 billion for the week. With the lowest level of demand since May 2009, Treasury yields continued to slide after yesterday’s chaotic session.

The 7-year yield moved 3 basis points higher to 3.32 percent while the 5-year closed at 2.63 percent, an increase of 4 basis points from the prior close. The 2-year yield was close to flat and ended at 1.08 percent. The 10-year and Long Bond each moved 3 basis points higher to finish at 3.88 and 4.76 percent respectively.

Posted by John Adams on under BondSquawk
Tags: , , , , —

U.S. Swap Spreads Mired in Negative Territory

Courtesy of Rom Badilla, CFA – Bond Trader

Many people including mainstream media are scratching their heads on today’s action as the yield on 10-year interest rate swaps traded well below the yield on 10-year U.S. Treasuries.

10yr Swap Yields Are Not Supposed to be Lower than Treasuries!

Theoretically, such a dynamic should not happen since Treasuries are backed by the safest creditor in the world while entering into an interest rate swap agreement subjects an investor to credit risk stemming from the counterparty, such as a bank or financial entity. Such risk should command incremental return to the investor in the form of higher yield and thus a positive spread between the riskier swap and the risk free Treasury. This was not the case as the spread entered into negative territory for the first time in recent history.

There are three catalysts that point to this event with the first being the Federal Reserve’s latest policy statement suggesting that short term interest rates will remain low and accommodative for the foreseeable future. Essentially, the Fed will keep the Fed Funds rate at current levels until improvement in the country’s unemployment rate and as long as inflation remains subdued. The second is the waning demand for U.S. Treasuries as evident by today’s auction and increasing risk for sovereign debt such as Greece and Portugal, which was downgraded by Moody’s today to AA-. Each fact points to higher yields. The third catalyst is the impending amount of corporate debt issuance.

The best way to illustrate this is to analyze it is from the perspective of a corporation that is looking to issue debt and minimize the subsequent interest expense. This can be done particularly in this rate environment by issuing out floating rate debt, which closely tracks short-term rates like the Fed Funds rate. Since the Fed Funds rate should remain low and anchored due to the aforementioned reasons, this is ideal for a corporation. However, investors who are trying to maximize returns prefer to receive a higher set or fixed coupon that will closely resemble the 10-year note (plus credit spread commensurate with the corporation).

In order to bridge this gap of needs, a corporation will cater to investors by issuing debt with a higher fixed coupon. Unfortunately, with longer maturity yields tracking higher due to the aforementioned reasons of the weak Treasury auction and the increasing sovereign risk, this is far from ideal for the corporation. This can be circumvented by entering into an interest rate swap agreement with a counterparty, such as a bank.

The swap agreement will allow the corporation to receive a fixed rate from the bank, which will offset the fixed rate amount paid to investors on the debt, in exchange for paying a floating rate to the bank. In essence, by entering into a swap agreement, a corporation is able to reach its goal of issuing debt and minimizing interest expense.

So going back to today’s environment where on the horizon, large amounts of corporate debt issuance is hitting the market with not enough counterparties to offer swap agreements, the price increases (in the form of declining yield on the interest rate swap) due to higher demand and insufficient supply. This market imbalance is the reason why swap spreads on the longer end of the curve turned negative and counter to market theory.

While it is difficult to gauge how long this imbalance will persist, I do think that 10-year swap spreads will revert to its proper relationship. I think that if the corporate calendar finds a respite and if market volatility spikes (VIX jumped 7.3 percent today) due increasing sovereign risk, equity weakness, mounting Treasury supply, or some combination, swap spreads could widen back into positive territory where it belongs.

Disclaimer

The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of iTB Securities LLC or its employees.

Posted by John Adams on March 25, 2010 under Bond Chatter,BondSquawk
Tags: , , , , , —

E-Trade Names New CEO

Starting next month, former Citigroup exec, Steven Freiberg will take over the reins of power at E-Trade Financial. Freiberg will become the new CEO for the brokerage firm replacing another Citigroup alum, Robert Druskin.

Druskin will continue as chairman after serving as E-Trade’s CEO after Don Layton stepped down at the end of 2009.

As Freiburg assumes his new duties, he will also become an E-Trade board member.

Posted by John Adams on March 22, 2010 under BondSquawk
Tags: , , , —

Week in Review: Greece Healing, Fannie Mae Scrambling

Courtesy of Reva Capital Markets

Bookmark and Share

Summary:
The focus last week was on comforting news from Greece, the jobs report and the news on the GSEs. Greece announced an austerity package which was blessed by the EU, and it finally issued a 10-year bond. Stocks rose by 3%, mostly on relief about the jobs report. Treasury rates increased, but the biggest move was a tightening in swap spreads and a decline in volatility.

Fannie Mae provided details regarding the priority of its planned delinquency buyouts, which wreaked havoc among dollar rolls. Prepays were released, and were pretty much in line with expectations with Freddie Mac speeds spiking due to buyouts. Agency MBS outperformed Treasuries across the coupon stack. The non-agency MBS sector was unchanged. CMBS saw a lot of activity in 2nd and 3rd pay AAAs, driven by demand into the last legacy TALF subscription. Spreads though were flat to marginally tighter.

Economy:

• Economic data releases were mixed and distorted by snowstorms. The effect on payrolls was less than feared, and overall the report was better than consensus expectations. Nevertheless, the unemployment rate remained at 9.7%.

• Greece announced a 4.8bn euro austerity package, which was blessed by the EU and paves the way for support if the need arises. Greece also issued a 5bn euro 10year bond, which was comforting even though the issue came at a sizeable concession. Note that Greece has to find around 20bn euro funding over the next 3 months.

• The House approved a $15bn payroll tax credit for firms that hire workers who had been jobless for at least 2 months The Senate is considering a $150bn plan to extend unemployment benefits. .

• This week is light on the data front with retail sales on Friday being the highlight. In addition we get wholesale inventories and the budget on Wednesday, claims and trade balance on Thursday and business inventories and University of Michigan consumer sentiment on Friday.

• On Thursday China is expected to report a raft of economic data with numbers of inflation and sales. With very strong data, we would not be surprised for China to take some more tightening measures.

• Last week Fed Vice Chairman Donald Kohn announced his intention to retire when his current term expires at the end of June. With 2 other Fed governor positions already vacant, the President needs to now fill 3 seats. Given that Geithner and Summers are leading the search for Kohn’s replacement, it is expected that centrist candidates will be chosen. There are no obvious candidates for the posts.

Rates:

• The Treasury market was influenced by positive news from Greece, stronger than expected jobs report and a slightly hawkish ECB. The curve sold off and flattened marginally. Over the week, 2y:+10bp, 10y:+9bp, 30y:+11bp.

• The Treasury auctions $40bn in 3s, $21bn in 10s and $13bn in 30s next week. Heading into supply I would think that the curve bear steepens.

• Swap spreads compressed to historical lows in the 2-10 year sector. While I think that the last leg of tightening was capitulation due to bad longs in the trade, swap spreads should stay relatively tight due to structural factors – low implied vol, tight levels of spreads everywhere, high Treasury debt/GDP.

• On Friday, the Chairman of the House Financial Services Committee Barney Frank called into question the safety of investing in Fannie and Freddie (debt or MBS), forcing the Treasury to issue a statement reaffirming the government’s commitment to the companies their creditors and investors. It signals that the question about the future of the GSEs is far from being resolved and fraught with uncertainty.

• There were rumors that the GSEs cut fed fund credit lines with non-US banks last week. This would have normally brought Fed fund effective lower (greater bargaining power of the US banks to give a lower rate for fed fund lent). However, due to concerns around the next step for the GSEs- reverse repos with the Fed etc, fed effective actually increased by 5bp on Thursday.

Thought for the Week:
The economic data over the next month is likely to be distorted by weather, so the market is more likely to be focused on the impending Fed exit. Note that the ABS TALF and legacy CMBS came to an end last week, and the MBS purchase program is slated to end at the end of March.

A year ago, most people felt that March 2010 would signal a spread widening, higher rate, steeper curve as the marginal and highest buyer of agency MBS steps await the Fed exit. But today the market is much more complacent – I would argue a little too optimistic that it will be a low volatility event. The market is priced for extremely low levels of volatility in rates and spreads. I don’t believe that there will be any blow-out in MBS spreads on April 1, but I do believe that spread volatility will increase, and spreads will grind wider over time. With a price insensitive buyer exiting from the market, it will take some movement in spreads in order to find the market clearing level, and the next marginal buyer.

Posted by John Adams on March 8, 2010 under BondSquawk
Tags: , , , , , , , , , —

Better-than-Expected Employment Report Drives Modest Gains

Modest gains fueled by better-than-expected employment report.

Bookmark and Share

A stronger-than-expected employment report caused the yield curve to steepen and Treasury prices to sell off on Friday. Trading volumes were high and the sellers encountered bottom pickers at around 99-20 on 10yr notes.

This has been a great week for risky assets as stocks, corporate bonds, and municipal bonds were all trading to near term highs (price).

Now that the Greece credit woes headlines are slowing down a bit, the market can have room to run for a little while to the upside. This has been confirmed with a healthy dose of new bonds this week in both Muni’s and Corp bonds – as issuers take advantage of buyer’s bullish sentiment.

This was also confirmed on the retail side with another record $2.6 billion being piled into global bond funds as investors reach for yield. All in all, this week’s market performance makes the credit crisis of 2008 look like its fading into distant memory.

However, let us not forget that the US employment market did lose another 36 thousand jobs this past month and many market pundits, including Bond King Bill Gross, believe that we need to gain at least another 200k jobs a month in order keep the unemployment rate from rising.

Posted by Mike on March 5, 2010 under BondSquawk
Tags: , , , , —

Coming to Know and Embrace the Bond Market

By Phillip L. Zweig

Like many financial journalists, I learned much of what I know about financial markets and investing at the proverbial school of hard knocks. In making my first fixed income investment, I assumed that bonds, unlike stocks, were a safe place for conservative investors, like me, who wanted to sleep well at night. But I discovered that this assumption was not necessarily a valid one.

My initiation on the realities of the bond market began when I was a young freelancer in the late 1970s. At the time, virtually all of my meager savings were in a Merrill Lynch money market account, then a relatively recent innovation. Then one day my broker pitched me on a bond fund that, he claimed, I could never go wrong with. Indeed, its performance was acceptable until October 1979, when former Federal Reserve Board chairman Paul Volcker, in a bold move to tame inflation, announced changes in Fed monetary policy that ultimately caused interest rates to surge into the upper teens. The value of my fund plunged overnight, whereupon I learned that when interest rates rise, prices turn south— particularly if the fund is long-term, as mine was. Chastened, I promised myself that I would never again invest in a bond fund.

Then in the early 1990s I figured it was safe to go back in the water, as long as it was in the shallow end of the pool. The yields looked good on a short-term global bond fund, but I neglected to read the fine print in the prospectus. As it turned out, the fund was embedded with exotic derivative instruments, which Warren Buffet would later dub “weapons of mass destruction.” So when the markets whipsawed in 1994, I took another hit. I also concluded that volatility would always be with us.

Investing in individual bonds seemed to be a better approach, but finding the right ones was no easy matter either. For practical purposes, most retail investors have had to take what their brokers offered. And it was (and still is) virtually impossible to determine what the fees were on these transactions, and who was getting the better deal—the broker or the client. So when I was assigned to write the bond column for Business Week’s investment outlook issues, I treaded very carefully in offering advice to readers.

Which is why I welcome, in this turbulent and uncertain economy, any tool that enables individual investors to avoid the pitfalls—and take advantage of the opportunities—of this complex and opaque market. In my opinion, BondSquawk is a tool whose time has come.

Posted by Phil on March 2, 2010 under BondSquawk
Tags: , , , , —

Welcome to BondSquawk

Thanks for stopping by and checking out the action here at BondSquawk. Our aim is to provide an unbiased view of one of the largest (but under reported asset classes in the world) – The world of bonds.

We are still in the process of setting up, but we invite you to take a look around.

Our formal launch will be on March 3rd, 2010 where we will have some exciting contributions from some renowned guest contributors.

We look forward to you becoming part of the BondSquawk Community.

On our BondSquawk blog and community forum, we will study, analyze and report anything bond or macro related. (BUT WE NEED YOUR HELP)

Our mission is to encourage an active dialogue amongst the investing public while leveraging the Internet to create a flow of information to help make us all better investors. We invite you to join our community. We encourage you to speak your mind – ask questions or bring answers.

So who are we and why do we care?

We are a team of experienced bond market peeps and journalists who are concerned about the lack of transparency in the bond markets. Retail investors have always been kept in the dark far too long and we believe now is the time to shed some light on the subject. You no longer have to be a Wall Street insider to understand the market opportunities that await you.

Work with us and together we will shed some light and learn from one another about the intricacies of the Wall Street profit machine….the bond markets.

Posted by John Adams on February 25, 2010 under BondSquawk
Tags: , , , —

Across the Curve: Gone but not Forgotten

There was a very interesting blog many of us enjoyed over the past couple years know as Across the Curve. The purpose of that on-line publication was to “inform and illuminate” readers about the movements of fixed income markets.

As we continue to build the BondSquawk community, we hope many of you will take the time to stop by and read what our traders are telling us about current and future market activity.

We are hoping to gather the same quality commentary and observations that made “Across the Curve” a pleasure to read.

Posted by John Adams on under BondSquawk
Tags: , , —
« Newer Posts