Closing Comments for April 16 2008

April 16th, 2008 3:40 pm | by John Jansen |

 Prices of Treasury coupon securities plunged today as a rip roaring (rip either because it is rest in peace time or if rip van winkle awakened from a multi year sleep he would think it is still 1999) equity market rally which drained strength and cash from the bond market.Other factors contributed to the bond market calamity as well. Corporate bond supply was heavy with GE issuing $8.5 billion of new debt . And the higher yields in the Treasury market sparked selling and paying by mortgage types who were the victims of unwanted duration extension.

Yields on benchmark Treasury securities reached the highest levels in quite some time and broke through key support levels. The yield on the benchmark 2 year note has jumped 10 basis points to 1.96 percent. Traders clubbed the 5 year note as if were a baby seal and its yield surged 12 basis points to 2.82 percent. The yield on the 10 year note is higher by 10 basis points and rests at a six week high of 3.70 percent and the yield on the Long Bond has climbed 8 basis points to 4.52 percent. The yield differential between the 2year note and the 10 year note closed the day at 174 basis points.

Some participants with whom I converse are troubled by the spectre of inflation. While the report issued today was not ugly ,the surge in commodity prices and agricultural prices reminds investors that there will be no inflation relief in the near term. The best bet is that the headline number will only worsen as we go forward. So some traders think that the process has begun by which the market adjusts to the Federal Reserve signalling that the ease cycle is over or is nearly done. That would not bode well for the 2 year note and would precipitate higher yields in that sector.

This time of year The treasury market is seasonally weak. Next week should bring a 2 year note auction and a 5 year note auction. I believe that there is also a TIP bond on the horizon. Shortly thereafter the Treasury will announce the May refunding. If I am right, I suspect that yields will be rising but I would be looking for spots to buy throughout this stretch and the reward will come later in the year. For now stay nimble and do not be stubbborn.

The Federal Reserve released its Beige Book today and the contents of that analysis only briefly halted the rise of the equity market. That report noted that economic conditions had deteriorated since the last report. It specifically noted that growth had slowed in nine of the twelve Fed districts and blamed anemic real estate markets and a slowdown in consumer spending.

Economic reports issued today present a mixed picture. The CPI report came out precisely as the pundits expected but it does offer a picture of stubbornly high inflation. Year over year inflation has increased at 4.0 percent through March and core inflation is up 2.4 percent in the same period. The core level has increased from 2.3 percent for the one year period ending at the end of February.

Industrial Production confounded the experts and rose by 0.3 percent and capacity utilization declined less than expected to 80.5. The jump in IP is certainly atypical for a recessionary period and suggests that the recession might well be shallow.

Housing starts took a significant tumble as did permits. Refer to my earlier post in which I posted the analysis of old friend Ian Morris of HSBC. This sector remains very weak and the rest of the economy will suffer while the problems repair themselves.

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  1. One Response to “Closing Comments for April 16 2008”

  2. By NUREG on Apr 17, 2008 | Reply

    “Some participants with whom I converse are troubled by the spectre of inflation. While the report issued today was not ugly ,the surge in commodity prices and agricultural prices reminds investors that there will be no inflation relief in the near term.”

    As you know, many individuals think that inflation as measured by the CPI and related benchmarks is underestimated. What do your contacts in the credit markets think about the quality and accuracy of the inflation data provided by the government?

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