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| Daily Jurojin - Friday, May 15, 2009 |
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Friday, May 15, 2009 Global bondsWe were recently spot on in our assessment that both German and U.S. bond yields would press higher as pressure grew surrounding the belief that perhaps global economies were recovering. In fact to be strict, we cast an eye on the charts of 10-year note prices and surveyed a pretty ugly landscape and felt the weight of evidence favored at the very least a reconnaissance mission to test investors' resolve. The evidence was leaning towards, perhaps just or maybe it's possible that a recovery is underway, just enough to trigger nervous liquidation. And that turned out to be precisely the case. Risk appetite last week was all of a sudden back on the agenda and that was enough to cause all movie-goers to run for the exit at the same time as if someone had yelled "fire!"U.S. yields surged as did those in Europe as bond prices plunged for fear that an escalating recovery would allow policy-makers to pat themselves on the back and take away the punchbowl. Earlier, we'd also noted that various central bankers had sung a rather different tune than investors were. They seemed far, far more somber about the fact that the pace of decline was abating. It was very much as case of the half empty glass rather than a half full one according to central bank speak. In line with our late-in-the-week warning last week that bond investors would need to be equally prepared for a reversal of fortune for bond prices, we this week told subscribers to Jurojin Weekly to consider buying three-month Eurodollar futures on the CME. On Tuesday morning in our regular as clockwork issue we observed that cash rates were gradually thawing and that the recent push-higher in yields might make this an opportune time to buy this interest rate future. "During the last few weeks, interbank cash market rates have eased in a sign that the credit markets are thawing. In fact three-month U.S. dollar LIBOR - the rate at which banks can fund their books in the wholesale money market in London - slipped to below 1% for the first time as banks' reluctance to lend to each other subsided. We're trying to play this through the Decmeber 2010 contract, which implies a 2% three month dollar LIBOR rate at expiration. If we're right about the fact that the recession is likely to last longer than current expectations, we should see this contract nudge higher." The Supreme Council of the Secret Order of Jurojin |
