Yes yes — suddenly, a bad last day of May for the stock market:
Here’s an interesting thought. Could the gold sell-off be related to a squeeze on collateral brought on by a series of very different bank crises in Europe, starting with the SNS Reaal nationalisation and Anglo Irish emergency assistance operation and culminating with the Cyprus crisis?
It’s a theory being considered by Jeffrey Snider, chief investment strategist, at Alhambra Investment Partners.
The basic point being, when you haven’t got anything to repo and funding becomes tight, gold is likely to sell-off in anticipation of further banking and asset problems. Read more
US Treasuries are kicking up with the 10 year threatening to push through 2 per cent for the first time in quite a while. It’s a little bit of economic optimism — better data means more chances of Fed tightening.
Capital Economics did the needful and put voice to the idea that the bull rally in Treasuries might have further to run for all sorts of not very contrarian reasons (our emphasis): Read more
It’s not perfect, we know. But the weekly CFTC derivative positioning report is still a useful barometer when it comes to gauging investor sentiment.
On which note here’s the breakdown of the latest report with respect to UST spec positioning, courtesy of TD Securities: Read more
Last week, Kit Juckes at SocGen was one of many analysts who, after looking at the latest FOMC minutes, found fit to arrive at one overriding conclusion: the era of Risk-on, Risk-off (RoRo) investing is arguably coming to an end.
As he explained… Read more
This is reassuring (or not – we can’t decide). The Global fixed income strategy team at HSBC *believe* they’ve come up with a non-consensus view on the effects of QEternity:
Our non-consensus view is that QE3 will drive US Treasury yields to new lows Read more
Okay, who’d forgotten that FDIC deposit insurance for non-interest-bearing transaction accounts expires at the end of December?
We confess, it did slip our minds – momentarily. Read more
US 10-year Tips breakeven rates are surging, and talk of a revival in inflation expectations is, understandably, doing the rounds.
But we’re not entirely convinced that it is that simple. Read more
Bloomberg writes about a report by the US defence department to Congress about Chinese holdings of US Treasuries, and has helpfully uploaded the document itself (click below to open in pdf):
Arvind Krishnamurthy and Annette Vissing-Jorgensen have an interesting variation on what the Fed should do next: start buying MBS while selling longer-term Treasuries.
Buying MBS, of course, has been widely discussed as a potential option if the Fed chooses to begin another round of large-scale asset purchases, but Krishnamurthy and Vissing-Jorgensen are the first economists we are aware of to advocate also dumping long-term Treasuries. Read more
The US borrowed for 10 years at the lowest rate ever in Wednesday’s auction (technically a reopening of an existing bond). Read more
It is impossible for all investors to be invested in safe assets all at the same time.
That’s because risk can never truly be eliminated. It can only be transferred or managed. The more people pour into “safe assets” at the expense of “risky assets”, the more they transfer risk into the original “safe asset”. Read more
With a hat tip to Blood and Treasure, the Committee of 100 (how mysterious does this lede sound already?) has released a big survey of how the US and China see each other. Previous one was in 2007.
There are some fun financial/economic sidelights… and some confused elites: Read more
Floating Rate Notes
As noted in the February quarterly refunding statement, Treasury believes that there are benefits to issuing floating rate notes (FRNs). In recent weeks Treasury has received a significant amount of feedback on the topic, in part through a formal request for information published in the Federal Register. Read more
Professor Lew Spellman, from the McCombs School of Business at the University of Texas at Austin, has posted on on what he calls gold’s changing role in the global economic landscape.
Amongst other things, he says the epic hunt for “safe collateral” — which has driven down yields on traditional fixed-income investments in the process — is the direct result of there being too many debt liabilities/obligations relative to safe collateral in the system. Read more
Let’s start with “Federal Reserve Independence Day“ – March 4, 1951.
Nowadays… when financial repression is all the rage, people seem more interested in what caused the Fed-Treasury Accord of that year, rather than what happened after. Read more
Fitch Ratings’ report on repo and shadow banking from February 3 has just been posted on the Fitch Ratings website — available to all who sign up for a login.
While its key themes were covered extensively by our FT colleagues back in February — namely that the use of lower-rated debt as collateral had returned to pre-crisis levels — one table buried deep in the report did catch our eye: Read more
Something on the Treasury sell-off last week from RBC’s Michael Cloherty, which we found interesting… it’s another theory about what caused the selling, and whether it’s ‘the big one’ for risk.
We noted earlier that during the sell-off, the yield curve flattened, i.e. the rise in yields on longer-dated bonds was more or less matched at the short end. Whereas you might expect (say) 30-year Treasuries to be particularly sold off, if a fundamental paradigm shift in real rates is suddenly here. So – Cloherty says the selling of short-dated bonds reeks of a carry trade being closed out. Read more
All eyes are on the US Treasury bond sell-off (the longest drop since 2006 according to Bloomberg).
Given that, we thought it might make sense to throw this little development into the mixing bowl of the theories that are doing the rounds with respect to what’s driving it. Read more
Real rates, to cut a long story short. Treasuries should be returning to trade inversely to equities, although stocks didn’t soar on the two days this week that bonds have slumped.
While eurozone sovereign debt did improve. Read more
Pimco’s Total Return Fund, managed by Bill Gross, now holds Treasuries to the greatest extent since July 2010, departing from sharp cuts to its holdings in 2011, Bloomberg reports. Holdings of US government debt rose to 38 per cent last month from 30 per cent in December. The fund gained 2.13 per cent in January, beating almost all of its peers, according to Bloomberg data. Gross nevertheless faces rising doubts that the $250bn Total Return Fund has become too big to manage and too reliant on derivatives, says Reuters in a special report. Read more
Global stocks hit a fresh six-month high as hopes for a worldwide economic recovery outweighed the sentiment-sapping impact of the lingering eurozone fiscal crisis, the FT reports. The FTSE All-World equity index was up 0.5 per cent, its best level since the start of August, while traditional “risk on” features populate ddealers’ screens. S&P 500 futures suggested Wall Street would start the session with a gain of 0.2 per cent, leaving the benchmark index just 1 per cent shy of its best close since the summer of 2008. The FTSE Eurofirst 300 was advancing 0.6 per cent as miners and banks showed form. Industrial commodities were seeing demand, with copper up 1 per cent to $3.92 a pound, and Brent crude consolidating above $116 a barrel. US 10-year bonds moved back to the 2 per cent level, up 2 basis points on the day, as residual haven buying was counteracted by optimism that the US economy was gaining some traction, following Friday’s stronger than expected jobs report. The US Treasury is set to auction $72bn in securities this week, with $24bn of 10-year Treasuries up for grabs on Wednesday. Read more
FT Alphaville would like to survey the following statement:
Economists are failing to account for mass technological innovations when making forecasts and constructing models. Read more
Many risk asset benchmarks were trying to consolidate near recent highs as the optimism released by improving manufacturing data continues to reverberate across global markets, the FT reports. S&P 500 futures suggested Wall Street would open little changed, and the FTSE Eurofirst 300 was up just 0.1 per cent, a fractional gain that nevertheless took the index to fresh six-month highs. Risk appetite was not entirely dominant, however. Copper was seeing profit-taking after its good run, losing 0.7 per cent to $3.82 a pound, while the euro was down 0.1 per cent to $1.3142 and the dollar index was up 0.1 per cent. The single currency was off its lows after a €4.6bn auction of Spanish bonds and a €8bn sale of French paper both saw good demand. Still, gold is up 0.3 per cent to $1,748 an ounce and haven Treasuries were softer, pushing 10-year yields up 1 basis point to 1.84 per cent. The FTSE All-World equity index was advancing 0.2 per cent to its best level since the start of August. The barometer has gained 21 per cent since its October intraday low and was up 7.4 per cent so far this year. Read more
Interesting exchange in the latest minutes of the TBAC – Treasury Borrowing Advisory Committee, which brings together primary dealers and US Treasury officials… (Hat-tip Bondscoop)
The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. DAS Rutherford [Matthew Rutherford, Deputy Assistant Secretary for Federal Finance] noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable. It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible. Rutherford noted that any decision on this policy change would likely be made at the May refunding. Read more
It’s been a while since FT Alphaville looked at settlement fails, but the following chart from RBC Capital Markets did catch our eye this week:
Marc Faber, publisher of the Gloom, Boom and Doom report, tells Bloomberg TV on Friday (our emphasis):
I wouldn’t say they are particularly attractive but, look, I am in Switzerland at the moment. The 10 Year government bond yields is 0.7% and you can buy quality companies and they have a dividend yield of maybe 3%. Relative to government bonds, equities are attractive. If you really think it through and you are bearish as I am and you think the whole financial system will one day collapse, maybe three years or five years or 10 years, one day there’ll be a reset and everything will be essentially started anew. Then you are better off in equities than in government bonds because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly. Read more
The US Treasury sold 10-year debt below a yield of 2 per cent for the first time on Wednesday, with investors locking up their money at low returns for the safety of owning government debt, the FT reports. The $21bn of new paper was sold at a yield of 1.90 per cent, the lowest level in the modern era, and inside last September’s auction yield of 2 per cent. Non-dealers bought 55 per cent of the sale and the bid-to-cover ratio of 3.29 times, a sign of demand for the paper, was the third highest on record. Pimco also disclosed on Thursday that Bill Gross had increased his holdings of Treasuries in the asset manager’s $244bn flagship fund for the third month in a row, to the highest level in over a year. The Total Return found now has a 30 per cent weighting in government debt, up from 23 per cent at the end of November.
Stocks and commodities were in demand as global growth hopes outweighed eurozone fiscal worries, the FT reports. The FTSE All-World equity index was up 0.6 per cent and copper was advancing 0.8 per cent to $3.44 a pound, while supposedly safer bets suffered, with the yield on benchmark Treasuries up 2 basis points to 1.98 per cent. Bourses in Europe were seeing early gains. The FTSE Eurofirst 300 was up 0.9 per cent as miners find some form, and US futures pointed to Wall Street opening higher by 0.4 per cent. The more upbeat mood was sparked by a strong performance in Asia, where the FTSE Asia-Pacific index added 1.1 per cent. The source, and standout, was Shanghai, which surged 2.7 per cent as traders betted on Beijing loosening monetary policy to counteract weakening domestic demand after December imports were softer than expected. Read more
JPMorgan sold $1.25bn of 30-year bonds on Thursday, paying historically low interest rates in spite of mounting concerns about banks around the world, the FT says. The bank benefited from plummeting yields on US Treasury bonds, which are the benchmark for bank bonds and other corporate debt. At 5.4 per cent, the bank was able to obtain the lowest coupon rate on 30-year debt in dollars sold by a US bank since at least 1995, when Dealogic, the data company, began tracking this market. But JPMorgan paid a much a higher risk premium to US Treasuries than the last time it sold long-term debt in the latest sign of how investor worries about banks have mounted this year. JPMorgan priced the 30-year bonds at a risk premium, or spread, of 250 basis points compared with a spread of 140bp when the bank sold 30-year bonds in July. The latest coupon was lower than 5.6 per cent on the bonds sold this summer. Read more