Home 
Daily Jurojin Archive
Daily Jurojin Archive
| Daily Jurojin - Wednesday, April 29, 2009 |
 |
 |
Wednesday, April 29, 2009 Drama dies down - yields riseAs we noted in Monday's Daily Jurojin rising stock markets for the past six months would probably help lift consumer confidence. On Tuesday the Conference Board's confidence survey's of current and future consumer expectations both rose, buoyed in part by the late rally for equity prices. Substantially lower mortgage rates throughout March and April of course helped consumers feel less gloomy, but they of course had no impact on home prices. The S&P Case-Shiller house price index indicated an 18.6% decline in house prices across 20 major U.S. cities nationwide.According to a New York Times/ CBS poll taken at the end of President Obama's first 100 days in office, 68% of the nation approved of his administration. A sense of all factors unifying behind the government and one of broad brush agreement helped see of an initial sea of red for the second day this week as investors bought stocks, helping the major indices close the day marginally lower. The rise in equity prices is sending a signal that the weight of optimism for a fight back from the deepest recession in several generations is outweighing the negative prospects for a second-dip caused by the swine flu. For further clues, look to the Japanese yen and the yield on the 10-year government note. The yen topped out yesterday when it strengthened against the dollar and the price of government debt slumped in response to the pickup in confidence and the lesser drop in house prices across the nation. The yield on the benchmark 10-year note rose from 2.90% intraday to 3.01% by the close as the prospects for mounting supply also made dealers nervous. For now, economic stability is key albeit at a low level, while the same news bodes badly for bonds. Before the end of the week the treasury will probably have issued $101 billion in fresh supply as the government attempts to backstop the banking system. Note yields are now closing in on the highest point since November, which by Friday we could just about call a six-month high. More bad news for bonds comes from this morning's preliminary GDP data, which is expected to show a 4.7% contraction and in-line with just about all other indicators suggests the economy's darkest hour has passed. Later today we'll read the statement fro the Fed, which again is likely to take an upbeat tone as it reflects on economic developments since the March 19th statement. All of these developments are causing the yield curve gradient - the spread between the two and 10-year yields - to widen out as investors consider a variety of factors. Monetary policy can't get any lower than the current zero to 0.25%. Credit markets appear to be functioning better than they were. Bond supply continues to grow with the government only yesterday revising its second quarter needs higher by $165 billion to $361 billion. Through 2009 the government needs to issue $3.25 trillion according to Goldman Sachs. And all of this negative news for bonds has caused spreads to breach the 2% mark with the gap reaching 204 basis points Tuesday as 10-year prices declined. The yield will likely push through 3.04 before this weekend and enter a new range. It would be no surprise if yields reached 3.25% within a fortnight. Just for fun, keep an eye on German bund prices for the remainder of the week. The ECB is expected to cut rates Thursday by perhaps one-quarter point to 1%. At the same time they are widely expected to address the thorny issue of quantitative easing - a discussion that's tearing at the heart of the member nation's governors. So far this week bund prices have risen with yield spreads against the equivalent U.S.10-year narrowing. Investors there fell for the swine flu story expecting a severe economic disruption leading to lower growth and pushed yields to 3.10%. Faced with relative tight monetary conditions, member nations are spending record amounts to stimulate their economies, and if course this has to be funded through debt issuance at the end of the day. ING Bank estimates that Eurozone member governments will issue Eur864 billion this year to stimulate their economies. June bunds closed at 122.96 on Tuesday but it shouldn't be long before we see 121.66 - a recent low - trade soon. The Supreme Council of the Secret Order of Jurojin |
