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My View on Financial Markets

1/21/2010 @ 06:51
Treasuries : Treasuries started the day in the green, building on their gains into mid-morning trade. The rally briefly paused near yesterday's opening levels, but another push in midday action lifted Treasuries to levels from Wednesday. The advance took place ahead of two Treasury note auctions on Monday and Fed Chairman semiannual testimony on monetary policy, which will take place on Tuesday and Wednesday.

Swaps : Swaps spreads are bound to widen a bit further - jan 21 10

1/5/2010 @ 15.57
There was a general impression amongst the participants that homesales number is going to be weak, and that turned out to be true. (eventhough people who saw my post yesterday evening, had the opportunity to snap a good chunk of 10s first thing at London time and made a good start for the year). Money and stimulus pumped in by the Government in 2009 pretty much vanishes before it reaches a normal, common American, no matter how big the rescue packages are. Let us see how this impacts Housing numbers or Unemployment numbers next week. As I have always been saying, the weekly jobless claims lead to misleading interpretations of jobs situation in America.

In addition to the 1yr, 3yr and Bills replenishments by Treasury, we are going to see several bouts of Municipals/State level and Corporate issuances in the next week, providing a lot more supply than you can possibly ask for..

1/5/2010 @ 11.55
Thank you all folks for your phone-calls and emails. Yes, that was a right call that I made last night - one of my followers leaves a message "What's the secret behind this prescience? How were you so Correct with Treasuries price-rise this morning? Glad I read your page last night and Thanks a million (all in bucks!!).. ".

Nice to see this feedback and appreciate your patronage. Honestly, last night's call was pretty easy and I put 2 and 2 together to say it is four. That's all. By the way, I am currently texting this message from my mobile phone and am busy with personal stuff. Will catch up with you all later this afternoon / evening.

1/4/2010 @ 17.52
Tens are about 3.84, just a bp higher than the open, eventhough the afternoon session had seen a brief recovery in prices (with yield dropping to about 3.81). Given that stocks had an impressive rally in the first day of this year's trading, treasury geeks mostly got support from encouraging remarks (from Ms.Distress's perspective) at Fed, where the talk for rate-stabilization at current low levels was hinted again for "extended" periods through the end-2010. What is notable is that market hasn't given as much weightage to Mr.Bernanke's hawkish remarks yesterday, giving minor philip to 2s driving their yield down by about 7bps.

One of my ex-colleagues was rejoicing when he said "looks like the bonds are given a small window of opportunity before yields shoot up, particularly on the long-end". I said that may not be a correct perception, and I explained the reason as follows.. The glamour of ISM's remarkable rise today (highest in past four years) has only jolted a 2bp rise - isn't that what I said yesterday.. Because of last week's Chicago numbers, market was already prepared for a record-breaking number on national ISM (and even the global numbers too). Therefore, the weight of Fed Officials statements has dominated the day's events, including the difference between a stellar performance Minus good performance on ISM side. Until the jobs numbers come out Friday, don't try to interpret the minor variations on treasury curve.

Dollar is back at 77.5 level eventhough EUR's Greece related concerns have resurfaced at some point this afternoon in some quarters.

Instinct tells me that tomorrow's pending home sales number is likely to follow the same housing story that we have been hearing from the past 15 months. With Gold and Oil nowhere to go and stocks gaining on the first day of the year, tomorrow's session may benefit my bond buddies a tiny-bit in their favor.

1/3/2010 @ 21.25
The fed officials are clear - yesterday's statements at American Economic Association reverberate without need of elaborate amplifiers that Fed will be marching the same formula-based approach to handling the seeming upsurge in economic optimism. They have had no qualms/regrets whatsoever in any of the steps that they had taken earlier (in 2001 or 2005), which I think sound more like assertations of haughty self-righteousness. In any event, what indicates to me, is that Fed will play the same game that they had played before and their responses will be an adaptation of same mechanical contrivances in previous tightening cycles.

This week will mark a notable event in the lives of many bond hawkers, some of whom might get the brunt of tough "morning-after" affects for underestimating the possible wrath of "good-feelings" in the economy. While ISM data may not generate humungous swings, the Jan 8th employment numbers are likely to be big movers. And this particularly in Bonds sector, because as I suspected significant chunks of Last week's $118 Bln bond auctions are now carried by the Dealers themselves and any signs of weariness would let these players dump the holdings at their earliest opportunity.

Dollar index is trading right around the 78 mark and we have notched down just shy of 93.15yen (the four-month high) against the Yen. With year-end buying gone, we need to see how the currency pares up in the first few days of the new year. Chinese have shown strong growth momentum going into 2010 lifting exports from South Korea, which implies we could see rate increases in SK and with US/European pressure on China to reverse its yuan policy.

On a side note, my attention is particularly drawn to the report from the Veteran economist from Harvard Mr.Feldstein who points to worrisome strains in the recent run-up out of the recession and when I read this article, it appears that the troubles of W-shaped recovery cannot be ignored after all.

12/31/2009 @ 14.22
Two breakthroughs in the latest report - the first time new initial claims fell below the 450k barrier in the post-Lehman-collapse era, into the 432k arena. Second notable event is the continuing claims that fell below 5MM mark. Some people are attributing plausible aberrations due to the severely inclement weather conditions in several parts of the country. Would I subscribe to that idea, a Big No.. We dont live in the same 70s or 80s when a newly unemployed individual would infact walk to an Unemployment office and register himself as such. It only takes a phone call or an online login to register and why would weather be a bottleneck for an unemployed individual to register? While on this, I am not saying that improvement in these numbers are indomitable evidence to prove solid job-creation. As I mentioned earlier, there is Not enough evidence to disprove the theory that the count of unemployed individuals who lost their benefits has reached the highest peaks ever..

Next weeks job creation numbers (Nonfarm Payrolls and Unemployment rate due 1/8) will throw that extra light and bond market would take a major cue. Even a minor corroboration of this week's trend would easily lift yields up north of 4% for the tens with the curve extending flattening from the current 269 levels.

On a side note, I plan to include several additional features on this platform in the New year, before February.

I wish all my readers a very Happy and a Prosperous New Year.

12/30/2009 @ 18.15
With such an impressive showing at Chicago, I wonder if the high degree of correlation with ISM (somewhere near 0.91) causes the national ISM - due on jan 4th - would elicit similar buoyant picture for our manufacturing sector. To add my nonchalant retrospection, I couldn't believe my ears, when someone indicated this leaked-out premonition for bond-market devotees. Looking at all segments of this report, while I cannot opine anything but to say that Chicago's manufacturing scenario did improve marvellously, I must advise that you should always take these questionnaire-based regional reports with a spoonful (not just a "pinch") of salt. And that's what the market participants did. Inspite of that stellar performance by Chicago PMI, 10s that were hovering around the 3.79 mark before the number, barely changed setting aside any/all qualms about implications of higher productivity leading to higher growth leading to fed's taking-away the punch-bowl.

On the treasury front, the 7-yr issue turned to out to be much better than what most mortals would expect. A 3.345% draw vs the high yield expectations of 3.375 before the auction!! And a respectable 2.72 cover, well above the average with about 45% indirect bidder participation. Everything looks cool and displays no fret whatsoever about inflationary concerns of an improving economy. Mmm..Hard to believe that inspite of these bulkloads of new supply and Chicago goodnews the Tens have infact gained two ticks at the end of the day.. No supply concerns until second week of Jan.

Like one of my friends in the Agency sector was pointing out, risk-aversion is a word that people have practically forgotten, so quickly that the spreads are moving in very tight, day-by-day. I pat my own back to congratulate the strategy of long agencies, short treasuries (simplest duration bet that one learns on their first day of trading) - strategy introduced towards the end of last year. With the spreads truncated by about 40 to 50bps, current year's p&ls of those who heard my suggestion would remain an everlasting memory in their personal bonus-wealth portfolios.

Tomorrow's unemployment numbers would be a big factor (only so long as it moves significantly above the 15k change on either side). If the number comes out to be within this +/- 15k number, the trend of tens trying to regain lost confidence by about 20bps in the past week would tend to be restored to a mediocrity. Else, (particularly a betterment to low 400s in the weekly number) would cause havoc to the already troubled bond portfolios. Most importantly, how would anyone remember it is a short sweet day before the holiday with most desks barely empty or with skeleton staff support.

12/29/2009 @ 17.12
Before I harp on the usual treasury sermons, lets take a quick look at Vix, and how dealers are targeting a vol collapse at year-end. For some of us who have totally forgotten that Vix had once hit the 90s handle last year, it has currently dropped to about 20 (from the 50s that we have noticed at the beginning of 2009). The vol-sell trade, i think is too hot to enter at this point. I would recommend staying away, if you havent already played it, in the last few weeks.

5yr auction ended with a decent 2.59 bid-to-cover and 44% indirect bidder participation. Not bad, after all those supply concerns. I heard some loners say that yesterday's 2yr and today's 5yr would be so different with a possible fiasco headed for 7yr tomorrow. As I have always been saying, those loners remain loners, we can already see the yields slowly picking up in the current 7yr sector, and I have a particularly strong feeling, that the bid-to-cover tomorrow should stay pretty close to average levels.

Towards the end of the day, I noted 10s recovering to 3.80 and dollar stronger at 92.05 with JPY. Inspite of all the talk that we heard recently, we see that 2009 is ending up with a normal every-year pattern, eventhough we had seen the biggest moves across all different asset-classes during the year.

Everyone's eyes set on Chicago PMI number due tomorrow at 9.45am.

2s10s spread back to 2 weeks ago at 271.6.

12/22/2009 @ 18.11
Mere fact that Greece has narrowly escaped the debacle (with a notch-better rating from Moody's than the worst anticipation) and thereby contributed to atleast a meagre recovery of lost strength in Euro. The woes of the currency may not be ephemeral, and hopefully the concerns affecting Greek bonds dont spread to Spain and its cognates. Even if this economic-flu halts at Greeks corridor, what really troubles me is the effrontery-belief that a nation's deficit would remarkably improve from Negative 12% of GDP to a tolerated 3% in a matter of 3 years. I have no intentions of being pejorative in this context, but just out of curiosity, I wonder why Greece would have waited for matters this long, if it had the ability to make a Remarkable V-turn in just a couple of years. On the other hand, I feel quite positive when I remind myself of the troubles that were lot worse (in the past) with countries like Mexico, Ecuador, Russia and Argentina. I am sure Brussels would certainly find an Abu Dhabi like solution to these Dubai type of problems.

Coming to our homeland, my sermons of yesterday are still valid and completely in congruence with the scene today. Tens have hovered around the 3.70 band all day with no respite to alleviate the sufferings of those "caught-unawares" long-positioners. Elsewhere I read today that Brazil will be reducing its esurient appetite for dollars, cause the Real Rally has cooled down atleast temporarily. Well that might not help the situation, atleast one piece of puzzle comes into where it belongs.

Time and again I have demonstrated my conviction that rates can't stay suppressed for long. Inspite of this belief, I did express my disbelief, when the GDP's final revision to 2.2% vs the expected 2.8% -- and when it didn’t have practically no effect on bond sentimentality. You get a feeling, is it that time of reckoning right now Or is it really the magic of existing home-sales number, which meant so trivial at certain other times in the past.

Unless the Newhome sales does a similar damage, I don’t think there is not much in terms of action until Thursday's claims numbers. Atleast we don’t have to worry about supply concerns until next week. Swap spreads have widened over a bp across the board (including the 30yr sector), in consonance with market/euro moods.

12/21/2009 @ 18.25
While the treasuries have walked the story-path, by pedantically bowing down to the advancement of equities, I think the rule of inverseness was followed much too harsh for the bond-holders. Equities, as a percentage have only risen about 1% on average (across the three barometers Dow, Nasdaq and SP500), whereas the percentage record of 10year yields have risen about 4.04% (about 14bps) to about 3.68 in today's session.

The story is clear. When we know that bonds get beaten, they get beaten up real strong. No signs of mercy, the simple "Rules of Force" concept that applies as it does in Physics. With the yields pressurized under historically low levels for the longest recallable span, the rule of Negative Correlation between Bonds and Equities is Bound to be more Pronounced, particularly on days when there is less volume.

When someone (I better keep the name anonymous) was saying that the Inverse Correlation between Dollar and Equities, was languishing following a technical pattern, I couldn't help feeling sorry for the sad state of affairs on some Trading desks. Isn't the Math so very simple. Do we really need Rocket Scientists to bring in new metrics into this field.. When the move in equities is positive (albeit mildly) and the safe-haven argument of dollar stays good and respectfully keeps the Dollar aloft, how CAN a Trader NOT know that the brunt will be TOTALLY on Bonds?? Simple Math.. Isn't it?

The bosses at the Fed are always smart and right, eventhough, sometimes they forget that people who eagerly wait for their "words of wisdom" don’t always act in the way they want to. Perhaps the basic math that I mentioned above is so clear, ahead of the game, and therefore the players never bothered by Fed's Evans statements wherein he categorically denied any urgency in recalibrating fed's policies in the near-term.

Interest rate story is well understood by Gold dealers and we notice that its price continues on its south-bound itinery. When I see today's market action, I felt as though the spirit of EMH stood right in front of me and showed me a world, wherein it looks as though everybody talks to every one else all the time and rules are strictly followed in the broadest sense of creative world.

12/20/2009 @ 17.41
Ahead of the holidays, the activity is likely to be very slow across the breadth of all capital markets. No economic numbers are due on Monday, eventhough we have Third Qtr GDP finals (12/22), Existing HomeSales(12/22), Personal Spending (12/23) data scheduled to be released this week.

Claims numbers will be released the day before holiday and the market's consensus expects betterment at the same steady rate that we witnessed in the past few weeks. As I pointed out in a previous edition, despite the mid-term election euphoria that is slowly beginning to catch up and the consequent glitter that tends to be tacked to these numbers, the numbers that really matter to the Consumer-side economists today is the Number of people that are getting dropped out of Unemployment rolls, consequent to benefits-termination. It is interesting to see that there has been a general upswing in the number of information-seekers to this new economic statistics that we (me included) have been recommending from quite some time now.

Nonchalantly contrary to the scattered predictions of some analysts, Treasuries did show marked volatility ranging almost 14 to 16 bps variation from the highs and lows of past weeks readings in 2,5 and 10year sectors. While Instability in Eurozone is fanning safe-haven support to the beaten-up dollar, the mounting concern about the plausible inflationary trends spiked by the $871 billion health-care reform and other stimulative trillion that is working its way through the economic network are the major players in this see-saw game.

In line with Munis and Corporates, the Swap spreads have also shown relative spread-tightening. In much the same manner depicted by one of the players that I spoke to, some of the big bond buyers seem to be buying almost anything that offers a decent yield. The big question of the day continues to be whether the belief in the evaporation of corporate defaults rate continues unabatedly or not?

12/16/2009 @ 5.03
Several market participants that I talked to this morning, expressed an expectation supporting a continuation of accomodative stance. And that's what precisely turned out to be. The words "deterioration in labor markets is abating" has not meant much to campers heading for holiday session.

While the same factors that orchestrated a revisit of 362bps on 10s (a high we haven't noticed since August), are cautiously saying "its only a matter of time" that Fed starts changing gears.

The oscillations we notice on USD/JPY wavering around 90s forebode a seeming strength that some people are noticing in the convalescing economic outlook. Many are eagerly looking out to see what's in store tomorrow with initial jobless claims and leading indicators numbers.

Why isnt that my buddy is not overly surprised with the 2s-10s steepener at its heights. Good thinking, should I say or the basics of "technical analysis" or the beginnings of understanding the concept "new level"..

Don’t recall comparable excitement about the Fed head's job-future, when the senate voting numbers come out at 9.30am tomorrow? Euphemistic, I guess is the right word.

In the corporate bond world, we have seen Sherwin Williams $500M 5-year note at just after the Fed's announcement time.

12/14/2009 @ 7.32
Nothing much should happen until Wednesday FOMC and then again I don’t expect much happening that day either. Impact of Holiday mood coupled with small offering calendar will probably keep bond market steady in a tight range. For the next few days, if the screens stay "as is", dont yell at the techies, thinking your pc is frozen. The tens are hovering in the low-50s band with the twos-tens slightly backing off from the steep 275 level.

Today's treasury offerings calendar just includes the 3m and 6m sectors. The next bout of 2,5 and 7 year offerings are not there until month-end.

Swap spreads are relatively static, moving less than a bp across the curve, with just the 7-yr sector slightly over a bp widening.

No major reports due today. We have PPI, Empire manufacturing and TIC-flow numbers due tomorrow. I hold the consensus view with 0.8% PPI rise for Nov.

Dollar continues to slide as the health of international recovery (in the light of Dubai and Greece) aims to prop up some support.

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