Opening Comments December 02 2008
December 2nd, 2008 8:15 am | by John Jansen |Prices of Treasury coupon securities are posting modest gains in overnight trading and remained poised to push through the record and historic lows attained yesterday.The yield on the 2 year note dropped 4 basis points to 0.86 percent. The yield on the 3 year note fell 3 basis points to 1.10 percent. The yield on the 5 year note dropped 4 basis points to 1.68 percent. The yield on the 10 year note slipped 3 basis points to 2.70 percent. The Long Bond yield is unchanged at 3.21 percent.
The 2 year/10 year spread widened a basis point to 184 basis points.
Economic data released overnight was bond friendly but it was not the tsunami of data that pushed rates lower yesterday and lacked a smoking gun which would have prompted significant fresh buying.
European PPI fell more than expected in October to 6.3 percent YOY from 7.9 percent YOY in September. Paid prognosticators had expected the level to be 7.0 percent.
Against this background, some participants are trumpeting the view that the ECB has latitude to push rates lower than previously thought when it convenes on Thursday.
In the UK a PMI for building companies plunged to 31.8 percent in November. That is the lowest reading ever for that series.
In Japan the BOJ acted to ease the credit crunch buy announcing that it will accept lower rated collateral for borrowings.
There is a dearth of data today with only monthly car sales on the docket.
I expect that Treasury prices will consolidate at lower levels today unless there is an overt move from the Federal Reserve to buy longer maturities. Three weeks ago today the Treasury auctioned $20 billion 10 year notes at a yield of 3.78 percent. That is a 113 basis point move and is reminiscent of similar moves in the 1980s when rates were plummeting from all time highs. What makes this 21st century move so unique is that the move this time began with a three handle on the 10 year. In the 1980s the race to lower rates began from double digit levels. I think that makes the current move all the more impressive.
10 Responses to “Opening Comments December 02 2008”
By Amicus on Dec 2, 2008 | Reply
I think that makes the current move all the more impressive.
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And all the more scary. Any commentator back then who thought that, at last, we’d whipped inflation (remember “WIN” from the ’70s?) rather than just taming it a little?
Just a month ago, a lot of smart people (Jim Rogers included) thought the long bond was headed deeply south.
Today, we appear to have capitulated to the worst possible scenario – deeply deflationary recession (avec “liquidity trap”). At least, it’s hard to believe it is just flows driving treasury prices. Given the risks to the currency, why would foreign money be in $-bonds (although how much does a dollar hedge cost now, with global short-term rates converging on … zero)?
By Alex on Dec 2, 2008 | Reply
Interest rate cut: Willem Buiter says fears of run on pound will hold back MPC
By Vin Skin on Dec 2, 2008 | Reply
Hi.
Can someone tell me what is meant by the “embedded floor” in TIPs with regard to CPI and deflation over the next year or so.
Thanks.
By ndk on Dec 2, 2008 | Reply
Can someone tell me what is meant by the “embedded floor” in TIPs with regard to CPI and deflation over the next year or so.
Vin, TIPS can’t pay out a negative coupon and they’re guaranteed to pay off at least at par. You can’t really look at them to gauge real interest rates or deflation anymore because they’ve hit the floor too.
By anonymous on Dec 2, 2008 | Reply
It seems like the moves in junk, leveraged loans, and other non-government debt has been just as pronounced (particularly when measured by spreads), but has been headed in the opposite direction. So are governments suggesting deflation while non-government debt suggests inflation?
By ndk on Dec 2, 2008 | Reply
So are governments suggesting deflation while non-government debt suggests inflation?
In my totally uninformed opinion, it’s a flight to “safety” being reinforced by forced buying and front-running the Fed. I’d rather play in anything than nominal T’s right here. If you’re trying to analyze deflation versus inflation, there are many better metrics.
By Amicus on Dec 2, 2008 | Reply
TIPS can’t pay out a negative coupon and they’re guaranteed to pay off at least at par.
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This suggests that, in the worst case, new-issue TIPs would/could trade like zeros:
From Treasury: “In September 2004, Treasury auction rules were amended to accommodate circumstances in which the submitted real yield bid is a negative number, or zero. Also, §356.20(b) states that if a TIPS auction results in a negative or zero real yield, the interest (coupon) rate for that TIPS security will be set to zero, with successful bidders’ award prices set accordingly.”
However, for “seasoned”/outstanding issues, until the indexed principal falls below par, can we still use them as a real-interest rate guage?
Afterall, the CPI has hardly been falling like a stone, and most of these issues have more than a few years of cumulative indexed “growth” in their ‘protected value’ computation (if I understand it correctly, that is). Put another way, the “daily index ratio” is positive for all outstanding issues, still…
http://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi_hiscpi.htm
In my totally uninformed opinion, it’s a flight to “safety” being reinforced by …
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we’re all certainly at risk of over-interpreting moves when the markets are moving this fast … god knows, I hope I am wrong and this is a ‘technical’ adjustment.
A YC under 200bps … is just frightening, to me (and I don’t like to think of myself as easily perturbed…ha!).
By Alex on Dec 2, 2008 | Reply
U.K. Government Credit-Default Swaps Rise to Record
By Steve on Dec 2, 2008 | Reply
I cannot wait for the Bloomberg chart to have 3% as the high line
http://www.bloomberg.com/markets/rates/index.html
By Steve on Dec 2, 2008 | Reply
Also Dan Norcini at JSMineset.com mentioned today that this Treasury activity is “front running using bailout money”. I take that as, yeah some large dealers or whatever were tipped off that the Fed was going to buy the long end and woo hoo, here we go.Borrow the cash buy the notes and bonds, sell em at a premium, tender the tidy profit. Yeah people will get bonuses for this!