Best of the Week
Most Popular
1.War on Cash, Bank of England Planning Hyper QE, Scrapping Cash for Digital Currency - Nadeem_Walayat
2.Stock Market End Run Smash Crash Looks Imminent... - Clive_Maund
3.Europe Refugee Crisis, UK to Repatriate 120,000 Hungarian Economic Migrants Back to Hungary - Nadeem_Walayat
4.The Great Deflation Will Destroy All Bubbles – These Too - Harry_Dent
5.Deflation Signals Abound for U.S. Dollar, Forex Markets and Commodities - Rambus_Chartology
6.U.S. Housing Market Two Outs in The Bottom of The Ninth - James_Quinn
7.Poland, Czech, Slovakia and Hungary Refugee Hypocrisy After Flooding UK with 4 Million Economic Migrants - Nadeem_Walayat
8.The Two Real Reasons Crude Oil Prices Are Currently Slipping - Dr. Kent Moors
9.R.I.P. Interest Rates - Andrew Snyder
10.Steps from a Deep October Stock Market Selloff - Bob_Loukas
Last 5 days
Putin’s Blitz Leaves Washington Rankled and Confused - 4th Oct 15
More Selling for Stock Market, Gold? - 4th Oct 15
Gold And Silver – A Reality Check - 3rd Oct 15
Stock Market Primary IV Still, or Primary V Underway? - 3rd Oct 15
The Oil Industry’s Day of Reckoning - 3rd Oct 15
U.S. Interest Rate Hikes Keep On Slippin' Into the Future; Treasury Yields Sink Again - 3rd Oct 15
China's Stock Market Crashing; Time for Panic or Restraint - 3rd Oct 15
SPX Stocks Bulls Struggle to Regain the Upper hand... - 2nd Oct 15
The Two Faces of Stock Market Volatility - 2nd Oct 15
Money Supply and the Fed’s Serious Inflation Risks - 2nd Oct 15
Stock Market How Bad Can This Get, And How Fast? - 2nd Oct 15
A Worrying Set Of Recession Signals - 2nd Oct 15
Negative Jobs Report Sents SPX, TNX Lower - 2nd Oct 15
Don't be Fooled by the Recent Equity market Rallies. Its a Bear Market, Stupid! - 2nd Oct 15
US Bond Market - How to Fix This - 2nd Oct 15
Survival Secrets from Colorado Resource Investing Front Lines - 2nd Oct 15
What Two Risks From Rising Interest-Rates Could Each Trigger A New Global Crisis? - 1st Oct 15
Stock Market S&P 500 Volatility-Based Price Probability Range - 1st Oct 15
Dow Stock Market About To Crash Like October 1929? Get Your Physical Silver - 1st Oct 15
Stock Market Negative Expectations Once Again - Will It Break Down? - 1st Oct 15
Advice for Biotech Investors: 'Hold Your Powder' 'til Winter - 1st Oct 15
Best Short-Term Commodity Market Opportunities - Video - 1st Oct 15
The Coming Corporate "Crime Wave" - 30th Sept 15
Stock Market Retracement May Have Run Its Course - 30th Sept 15
A Stocks Bear Market Is Now More Likely Than Not - 30th Sept 15
The Killer Ape, Human Evolution, Artificial Intelligence and Extinction End Game - 30th Sept 15
Junk Bond Market Imminent Collapse Threatens (Unwelcome) BIG Rate Rises - 30th Sept 15
Stocks: Why Following the Crowd is Usually a Big Mistake - 29th Sept 15
This Stocks Bear is Just Waking from Hibernation - 29th Sept 15
Interest Rates All Bad at 0%? - 29th Sept 15
If Stocks Can't Hold These Levels, We'll Have a Bear Market - 29th Sept 15
7 Bullish Gold Price Indicators - 29th Sept 15
Crude Oil Price Is Going to Fall by 50%… Again - 29th Sept 15
SPX Triggers a Amall Head & Shoulders Formation - 28th Sept 15
Stock Market Bubble Balloons in Search of Needles - 28th Sept 15
Gold and Silver, Precious Metals Complex Getting Interesting - 28th Sept 15
Economic Channels of Distress - Fourth Turning Crisis of Trust - 28th Sept 15
Stock Market Testing Important Levels - 28th Sept 15
Stock Market Going Down, Gold Chop Continues - 27th Sept 15
Stock Market Primary Wave IV Inflection Point - 27th Sept 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Bearish Trader Sentiment Bullish for Bonds

Interest-Rates / US Bonds Jun 22, 2009 - 01:19 AM GMT

By: Levente_Mady

Interest-Rates The bond market started the week with a decent tone but it pulled back on Thursday as the Treasury announced the details of next week’s bond auctions. In spite of the pull-back, the Long bond managed to eke out a small gain for the second week in a row. Real rates in the long end remain on an increasing trend as CPI declined from -.7 to -1.3% year over year through May causing the real long bond yield to close in on 6%. 

I cannot emphasize enough the detrimental effect that rising real rates will have on economic activity.  With the Fed Funds Rate already at 0 and longer dated bonds under pressure, the effect of Quantitative Easing has been negligible thus far.  I am certain this topic will be a point of focus at the Federal Reserve Bank’s policy setting Open Market Committee (FOMC) meeting next week.  With unemployment still rising and inflation deflating I expect no action on the interest rate front from the Fedsters. 

Treasury supply is an ongoing theme in the market these days.  Next week will be no different.  On tap will be another $100 Billion+ 2-5-7 year notes scheduled for auctions on Tuesday through Thursday.  While supply may put a lid on the market for the early part of the week, it is a known factor and the market has now factored in several Trillions of dollars of new issue notes and bonds for this year.  In other words, it is front page news; it has been front page news for months now and it is pretty much fully discounted for that reason.

Meanwhile in the real world, we had 3 more banks shut down by the authorities this weekend.  That takes the count up to 40 and counting for this year.  While the authorities managed to prevent a financial meltdown, everything is obviously not well in the world.  The record debt burden is not going anywhere.  As a matter of fact, it continues to grow.  Total debt (individual + corporate + government) in the US is closing in on 400% of GDP.  Previous to this debt cycle, the highest the debt to GDP ratio got was 250%.  Interest rates have hit rock bottom and Quantitative Easing is not addressing basic fundamental problems such as debt burdens, consumers losing their jobs and industrial production declines.  The deleveraging has certainly started in the private sector.  However, debt is not just disappearing; it is getting transferred from the private sector to the government’s books.  Eventually it will be the private sector that ends up paying for that debt. 

NOTEWORTHY:  The economic calendar was a mixed bag last week.  The New York Manufacturers’ Survey hinted at further slowing, while the Philadelphia Fed’s Manufacturing Survey improved by a whopping 20 points to a still negative -2 reading.  Housing Starts jumped 17% and Building Permits increased 5% in May.  On the other hand, homebuilders’ confidence declined a point to a dismal 15 for the same period.  I suppose they – the builder’s – are out there building them, I am just not quite sure how many folks are lining up to buy them…  The inflation data was lower than expected as the year over year figures continue to plunge further into negative territory.  As per the comment above, CPI is declining at a 1.3% rate, while PPI is dropping 4.5% over the same time frame. 

The news was all bad on the industrial front.  Industrial Production declined a worse than expected 1.1%.  The streak of declines is at 7 months on this front – with only one lone positive reading since the beginning of 2008.  Capacity Utilization continues to set record lows – the latest one at 68.3%.  Weekly Initial Jobless Claims ticked up 3k to 608k, while Continued Benefits dropped a substantial 148k to 6.69 Million.  Leading Economic Indicators improved 1.2% for the second consecutive month.  In Canada, the inflation picture is similar to the US.  Canadian CPI increased 0.2% in May as the 12 month figure dropped to essentially unchanged.  Canadian Retail Sales fell 0.8% in April, leaving the annual decline at 6.2%.  That is not good news for the economy.  This week’s schedule will include housing data as well as the Durable Goods report and new information on Personal Income and Spending.

INFLUENCES:  Trader sentiment surveys stayed in bear territory this week.  This is supportive from a contrarian perspective.  The Commitment of Traders reports showed that Commercial traders were net long 336k 10 year Treasury Note futures equivalents – an increase of 25k from last week.  This is still somewhat positive.  Seasonal influences are neutral this week before turning positive into month end.  The technical picture is improving as bonds are working on forming a bottom.  The 10 Year Note yield held the 4% level from the previous week, but ran into trouble as it tried to bounce.  We should get some follow through to higher prices during the weeks ahead.

RATES:  The US Long Bond future moved up a half point to 114-27, while the yield on the US 10-year note decreased 1 basis point to 3.78% during the past week.  The Canadian 10 year yield was 1 basis point higher at 3.51%.  The Canada-US 10 year spread shrank 2 basis points to 27.  The US yield curve was stable as the difference between the 2 year and 10 year Treasury yield increased 5 basis points to 258. 

BOTTOM LINE:  Bond yields declined a touch last week, while the yield curve was slightly steeper.  The fundamental backdrop remains weak, which is supportive for bonds.  Trader sentiment moved further into bearish territory – which is positive; Commitment of Traders positions are slightly supportive and seasonal influences are bullish.  I recommend keeping the long bonds that were purchased the other week.

By Levente Mady

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable.  Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors.  Please carefully consider your financial condition prior to making any investments.

MF Global Canada Co. is a member of the Canadian Investor Protection Fund.

© 2009 Levente Mady, All Rights Reserved

Levente Mady Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History