The market continued to edge lower overnight as the initial signs of stabilization in the credit markets have provided impetus to those interested in selling the market at these levels — with the iTraxx Crossover index narrowing
49 bps to 416/418 — well off its high close on Monday of 466 bps — consistent with the array of announcements encouraging for a temporary bottom in credit — Sowood/Citadel, Marathon, US auto earnings, Morgan Stanley upgrade, etc.
Is it really safe to go back into the water? We will err on the side of overcautious in this situation — admittedly it is tempting to suggest the emergence of dip-buyers in the credit market will offset any push lower in credit. The credit market appears to be self-correcting for the systemic/meltdown risks associated with the pullback in risk-taking, but does this mean there will be no broader economic implications from the tightening of credit standards and increase in risk premium? This remains the wildcard, to be sure.
Today offers a variety of key data, with core-PCE the headliner — we also get ECI, Chicago-PMI, Consumer Confidence, and PCE. We are broadly more apprehensive about any near-term upside to the market here, with correction/consolidation in and around the 4.85% 10-year yield zone a likely outcome. That said, the world as we know it does not suggest a 15-20bps downtrade, rather a test of the recent lows. Taking a step back, while we see a near-term softening the Treasury market, it does not feel like the entire credit/housing/cycle story is behind us.
TACTICAL BIAS: With a mass of data on Tuesday, 10s and 30s announced on Wednesday, and NFP and ISM on Friday, we don’t think the prudent thing is to take a big position. Arguably, with Treasury priced finding some near-term resistance against the recent highs, forced buying a good distance away, and data NOT the major provocation for a rally, we find ourselves seeking spots to sell. That is if the data is the reason for a bid while credit/spreads behave.
This is very tactical, of course. There are several reason we expect the market will improve after supply, and also the reason to think pullbacks will prove very shallow; 1) Seasonals. While seasonals didn’t work so well in Q2 yields are in the middle of the most bullish time of the year, one that carries into October, 2) Corporate issuance has taken a holiday and we think it’s unlikely to come back in August diminishing receiving needs in swaps but leaving the only duration to buy at the refunding, 3) August will finish with a big month end when investors are positioned flat — they’ll need to buy just to match their index, 4) we are entering a phase that should start to show the pension needs manifested in allocations from softening stocks to bonds, and 5) the technicals remain quite bullish on the weekly charts.
We pulled out of our TY long at 10708 but are not short. We’d like to buy in the
10628/02 area given a chance, and likely would buy if the data was especially soft for a probe back to 10800. We deem the move under the 200 day MA at 10712 normal behavior against such a benchmark and so 2-say action makes sense. Short term stochastics have curled off very overbought levels on the daily chart which is a cause for some concern and dovetails with our moving out of the TY long.
The curve, on a weekly basis, remains poised for more steepening and that works well a setup for the Refunding.
IMPENDING EVENTS:
* Month-End Index Rebalancing — weak in Tsy at 0.01 yr, average in all other categories, very strong in European Tsy.
* Personal Income, June — RBSGC estimates a 0.5% gain vs. 0.4% last.
* Consumption Expenditures, June — RBSGC estimates a 0.2% gain vs. 0.2% last.
* Core Deflator, June — RBSGC estimates a 0.2% gain vs. 0.1% last. YoY unchanged at 1.9%.
* Employment Cost Index, June — RBSGC estimates 0.9% vs. 0.8% last for 3 mos ending, up 3.5% vs. 3.5% last for 12 months ending.
* Chicago Purchasing Managers’ Survey, July — Consensus calls fro 58.4 vs. 60.2 prior.
* Conference Board Consumer Confidence, July — RBSGC estimates 106 vs. 103.9 last.
* Construction Spending, June — consensus calls for 0.2% gain vs. 0.9% last.
* Case Schiller Home Prices, May — Consensus expects index to drop 2.9% vs.
-2.1% last.
OVERNIGHT EVENTS:
* Market declined as the credit situation appears to have stabilized (as least
temporary) — Europe/UK react to Marathon fund, Hilton LBO, and Morgan Stanley credit upgrade — follow-through selling from the recent developments, no major new overnight news.
* European and Asian (ex-Nikkei) equity markets bounce on the stabilization in the credit story and the allocation-trade potential, DAX + 1.4% and Hang Seng+2%.
* EC, CPI, YoY, July — 1.8% YoY vs. 1.9% prior. Slightly lower than consensus expectations for +1.9% YoY. The market did little with the release, rather EGBs traded lower with the rest of the market.
* EC Confidence, July — -2 vs. -2 prior — exactly as expected. Similar limited reaction as the broader market edged lower.
NOTE: The views expressed are not of Bonds.com but of the unaffiliated author. Bonds.com makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.
Posted by bondsblog as Morning Call at 7:25 AM EDT
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Treasuries posted the biggest weekly advance in 10 months as the rout in mortgage and corporate debt and equities drove investors from riskier assets.
The risk of owning corporate bonds soared to a record on concern that banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts. Investors may pare bets the economy is slowing before the government’s monthly jobs report may show unemployment held near a six-year low.
“If we get a couple days without any big blowups, a good amount of the risk that’s been priced in will start to reverse,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of 21 primary dealers required to bid on Treasury auctions. “The market will focus more on fundamentals, which will bring a rise in yields.”
The yield on the benchmark 10-year U.S. Treasury note fell 19 basis points, or 0.19 percentage point, to 4.76 percent this week, according to New York-based bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due May 2017 rose 1 13/32, or about $14 per $1,000 face amount, to 97 30/32. Yields move inversely to bond prices.
The drop was the largest since the week ended Sept. 22. Investors fled falling equity markets and more than 40 companies worldwide reorganized or abandoned borrowing plans in the past month as investors balked at extending credit. The retreat has forced banks to take on at least $32 billion of debt and threatens to bring an end to a record run of LBOs, which topped $690 billion this year.
Price swings in U.S. government debt have increased to the highest since March 2005 during the fallout in credit markets. Merrill Lynch & Co.’s MOVE index, a measure of expectations for Treasury volatility, rose to 93.5 on July 26. The index fell to a record low of 51.2 on May 15.
Equity Correlation
The MOVE Index, based on prices of over-the-counter options on Treasuries maturing in two to 30 years, implies the yield on 10-year notes will move 21 basis points higher or lower over the next month, said Harley Bassman, a U.S. rates strategist in New York at Merrill.
Employers in the U.S. may have added 130,000 workers in July, according to the median estimate of 66 economists surveyed by Bloomberg ahead of a Labor Department report on Aug. 3. The unemployment rate is expected to remain at 4.5 percent, close to a six-year low.
Treasury yields have largely moved in the same direction as U.S. stocks this week. The 10-year note’s yield and the Standard & Poor’s 500 Index have had a correlation coefficient of 0.91 since July 23.
Correlation coefficients measure the coincidence of gains or declines based on closing prices. They range from -1, indicating two variables always move in the opposite direction, to 1, suggesting they always move in the same direction.
`Continue to Rally’
“Treasuries will continue to rally until we see a bottom in equity and credit markets,” said Richard Gilhooly, an interest- rate strategist in New York at BNP Paribas Securities Corp. The firm and Goldman are among the 21 primary dealers that trade with the Fed.
The Standard & Poor’s 500 Index lost 1.6 percent to 1458.95. The Dow Jones Industrial Average retreated 1.5 percent to 13,265.47.
About $521 billion in Treasuries changed hands, according to ICAP, the world’s biggest broker of trades between banks. On July 26, $599 billion traded, the most since at least June 2004. The three-month daily average is about $292 billion.
Credit-default swaps based on $10 million of debt in the CDX North America Investment Grade Index soared as much as $13,500 yesterday to $81,000, according to Deutsche Bank prices, the highest since the CDX indexes were created in 2004. The iTraxx Europe Series 7 Index of 125 companies with investment- grade credit ratings jumped 16,000 euros ($21,800) to as much as 60,000 euros, the biggest increase since the index was created three years ago.
Yield Curve
The difference in yields between two- and 10-year notes rose to 25 basis points from 19 points a week ago, the highest since September 2005, suggesting investors are seeking the safety of shorter maturities.
The yield on the two-year note fell 26 basis points this week to 4.51 percent, the biggest drop since the week ended March 3.
“To the extent the market continues to have worries that the higher cost of capital may lead to somewhat slower growth going forward, the two-year note has to discount” a slowing economy, said James Caron, primary dealer Morgan Stanley’s head of U.S. interest-rate strategy in New York. The firm expects a 2.3 percent growth rate for 2007, he said.
The Commerce Department said the U.S. economy expanded at an annualized 3.4 percent pace in the second quarter, compared with a revised 0.6 percent expansion during the previous three months.
To contact the reporters on this story: Deborah Finestone in New York at dfinestone@bloomberg.net ; Elizabeth Stanton in New York at estanton@bloomberg.net
To view the original article, click here.
Posted by bondsblog as Market Trends at 8:17 AM EDT
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If GDP comes in as expected….Oh, come now, that’s a bit of a joke. It’s not about GDP right now and we all know Q2 is a lot stronger than Q1 and Q3 will be considerably weaker. But that isn’t going to do that much for rates up or down today. Maybe tomorrow, but not today.
Instead, we will watch the screens and be mesmerized by the movement in the acronyms — ABX, CDX, LCDX, ITRAXX XO, etc. Ah, check that. The screens aren’t really that accurate for those if they are updated at all. So, instead we in the liquid markets look over to read the look on the faces of those engaged in those markets and politely ask “anything going on?” before having our heads handed back to us. Or is it just me?
We expect a choppy session ahead, at the least, with spreads perhaps calmer than on Thursday and to the extent they move sharply one way or the other, than rates/the curve will move the other. We are inclined to see a bit of a pullback given two well-in-the-money auctions under our belt, a refunding on the way, and Treasuries hitting some important technical objectives and retracements that could serve as interim resistance points.
We are not willing to make a grander call because it’s not about the norms we would typically follow. We do expect that the credit story will persist and note that the banks taking on the loans for postponed deals is a new element that seems troublesome. This story means that 1) they are tying up capital for longer than they hoped, 2) lose the IB fees tied to a deal, 3) have less capital to buy debt or underwrite others. Balance sheet constraints, in other words.
Given the environment we bet you won’t face rate lock selling this afternoon, but might have a large CMBS pricing (there have been two this week so they are getting done). If the overnight session is any guide, we put more emphasis on that word choppy mentioned above.
TACTICAL BIAS: We are holding a TY long and continue to lift a stop although we’d love to book the profit against the now prescient purchase at 10602. Our stop is now 10627/00 — we choose when we get there. Near-term we have to expect consolidation of these gains, i.e. 10s vs. 4.75%, 2s vs. 4.50%.
However, we think the big move is underway and the question is one of where to get long and whether the market will provide that much of an opportunity. As much as this has been a credit event, the recent softer tone to some data, or continuation of it in housing, does represent something that seem to be expanding vs. contracting.
We likewise think the curve is on the move and retain a target of 2s/10s at 30 bp in breakout mode. The market is starting to price in an ease — Dec Fed Funds are at 5.06% — and we think that can go further. To wit, if the market could price in more as recently as March (Dec funds traded 4.70%) there seems ample room for steepening given more recent events.
One trade we’ve liked seems to be on the move; selling 10s vs. 5s/30s. This fly rose to 18 bp today and stochastics have reversed up and MACD may be reversing, too. This is one of our favored trades for the balance of this year with a near target of 5 bp, but potential for 10-15 bp.
IMPENDING EVENTS
* Q2 GDP — Consensus is for a 3.2% gain.
* U Mich Confidence, final — 91.5 vs. 92.4 preliminary, 1yr inflation forecast WAS 3.3%.
* Fed’s non-voting hawk Lacker speaks at 11AM.
OVERNIGHT EVENTS:
* German CPI, July — states reporting and vary widely, consensus, with YoY at 1.8%.
* Japan CPI, June — -0.2% MoM, core -0.4% YoY, as expected and softer than prior.
* Japan Retail Sales, June — 0.9% MoM vs. 2% expected.
* Itraxx XO is wider 25 bp, had been even wider.
* Fed’s Custody holdings data show Foreign accounts sold $6.5 bn in Treasuries vs. adding 6.8 bn the prior week. Added Agencies in size however +14.7 bn vs.
-324 mn the prior week.
* Fed’s Dealer Positions data shows primary dealers extended shorts in Treasuries to 178.6 bn vs. 167.65 bn prior. Net dealer longs fell slightly to
137.55 bn vs. 140.99 bn the prior week — lowest since Fed ‘07.
NOTE: The views expressed are not of Bonds.com but of the unaffiliated author. Bonds.com makes no claim to and regarding the accuracy, correctness or completeness of the views expressed.
Posted by bondsblog as Morning Call at 7:50 AM EDT
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