The Wisdom Of Yogi: Berra not Maharishi

February 28th, 2008 1:31 pm | by John Jansen |

 Prices of Treasury coupon securities surged higher today powered by a variety of economic factors which together reminded market participants of the wit and wisdom contained in the musings of Lawrence Berra aka Yogi Berra who donned the tools of ignorance for the Bronx Bombers during the glory years of the 1950s and 1960s. “It aint over till its over”has been attributed to Yogi and I think that statement applies to the credit crunch and bond market rally. Whenever it seems to be receeding and some stability emerges, less than gentle reminders intervene to reinforce the depths of the problems.

The initial claims data was such a moment today as it reminded investors that the labor market which had remained steadfast in the face of eroding financial conditions is now feeling some of that pain. Initial claims flummoxed forecasters and their followers by jumping to 373K. It reinforces the notion that job growth is slowing and with it income growth for consumers. That does not bode well for consumption in upcoming quarters especially when one views the softness here in concert with the very weak levels in recent confidence surveys. Next Friday is an employment report day and investors will focus laser like on that report for a more comprehensive view of the job market. I believe that the current consensus looks for an increase of just 40K in payroll employment.

Government sponsored enterprise Freddie Mac stirred the pot with its dour earnings report as it announced to the assembled throng that it had dropped nearly 2.5 billion cool crisp dollars in the 4th quarter of 2007 as credit conditions deteriorated. In similar fashion to their FNMA cousins they expect challenging conditions for the remainder of the year. Sprint announced a Brobdingnagian loss of $29.5 billion in Q4 and Sears announced disappointing profits and declining sales. None of this is system threatening but it does not instill confidence in the near term prospects of the economy.

Turmoil in the credit markets has been the proximate cause of economic weakness and there was ample evidence that the turmoil continues unabated. A London based hedge fund has apparently spent the last several days pummelling the AAA portions of the ABX Index and and the declines in the index have motivated some selling from other unhappy holders forced to hedge at less than advantageous levels. SIVs were back in the news with reports that a couple of entities sponsored by Bank of Montreal had some liquidity issues. And in general the structured product market is a shambles with no buyers lurking in the weeds.

Separately, as month end approaches with a healthy index extension some players will front run those who need to buy tomorrow by purchasing today in anticipation of real retail buying tomorrow. And the Treasury market has been tempered by supply with a 2year auction yesterday and a 5year auction today. With the auctions complete the street will feel less restraint about buying as the Treasury is not waiting in the shadows.The Treasury did auction $16billion 5 year notes today at a yield of 2.755 percent which was nearly a basis point richer than they were in the screens at auction time.( So the taxpayers won this round in their regular tussle with the street.)

Now that I have completed that lengthy litany I can say that yields fell significantly. The 5year note was the superstar of the day in spite of the auction by the Treasury. The 2year/5year/30year butterfly richened by about 11 basis points today as the yield on the 5year note fell 14basis points to 2.71 percent. There was a buying panic in MBS yesterday and overnight in Asia and dealers needed to own the 5 year against sales of MBS to customers. The yield on the 10year declined 15 basis points to 3.70 percent. The 2year note yield tumbled 14 basis points to 1.86 percent and once again the Long Bond is the laggard as its yield fell by 10 basis points to 4.55 percent.

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