What’s Movin’ Markets – Wednesday, October 29th

  • China Cuts Interest Rates for Third Time in 2 Months (Bloomy)
  • U.S. Treasuries Advance on Forecasts for 75-Basis-Point Interest-Rate Cut (Bloomy)
  • Fed May Cut Rate to 1% in `Very Aggressive’ Response to Crumbling Economy (Bloomy)
  • World According to TARP No Laughing Matter as Treasury Tackles Derivatives (Bloomy)
  • Germany to Partly Finance Bank Rescue by Trading Bonds for Preferred Stock (Bloomy)    
  • Hungary Will Get $25.5 Billion Loan From IMF, European Union, World Bank (Bloomy)      
  • New York Pension Fund Has Lost 20% of Value Since April 1, DiNapoli Says (Bloomy)      
  • Home Prices Will Hurt U.S. Economic Growth More Than Stocks, Survey Shows (Bloomy)     
  • Bank of Japan Interest Rate Cut Speculation Increases After Nikkei Report (Bloomy)
  • U.S. States’ Credit Threatened by Slowdown, Market Strains, Moody’s Says (Bloomy)
  • U.S. Must Take Lead in the Rescue of Emerging Economies, Soros Writes (FT)


What’s On OUR Minds:


ZIRP. Right. Where to begin this historic morning? With so many of the biggest of big-brains ‘out there’ offering much better logic and common sense about what the Fed will do, should do and may or may NOT do as well as just WHATS NEXT, WE are gonna refrain from any further dart-throwing at the moment. We’d suggest flipping through the pages of StreetStuff this morning (summary below) and we’d point out that Goldman makes a most compelling case for 75bps rate cut. For us to even make mention of this sort of research, we have to point out that just over a week ago we really thought the Fed would take a pass today. NOW, that would be a grave mistake and IF the Fed wanted to moderate The Street’s thought process and pricing, it would have. Upsetting the apple cart would NOT be advisable, so they won’t.


SO, if we aren’t gonna get into the FedFunds target rate guessing game this morning, what ARE we thinking about? Glad you asked. Given we’re always and forever fans of sleeping at night, we’re continuing to search out what’s working best in that respect. We are diggin up a picture here of 2s/10s steepening (here’s a weekly look) and think it continues to fit the bill:




The Fed wants a healthy banking system AND it also wants IN-flation. At the moment we’ve got NEITHER and Chmn Bernanke suggested that he will NOT lose this battle, generally speaking. We think it most unwise to fade him and therefore we won’t. We can’t help but think about the steepening of the curve (even from here) as one way to express this. Another might just be to buy stocks as someone did yesterday. With about a 10% RIP in stocks, decent volume, and a rate-cut around the corner, it sure is easier to defend THIS rally, compared to others in recent past. BUT, we digress as that’s NOT what you are here to read about. WE’re bond-geeks and therefore will stick to the blocking and tackling. A steeper curve makes most sense to US given the Fed will cut rates later on this afternoon AND it also makes sense in context of supply coming. Make no mistakes, though, as we’re married to the idea, overall, AND at the very same time will continue to suggest this is all TACTICAL AS COMPARED TO STRATEGIC. We got a very good lesson about the differences between the two over the last couple of weeks. To put it short, tactical = trading and strategic = long term. We’ll continue to feel most comfortable leaving a position on IF it’s a steepening one. At some point in the not-too-distant future, this too may change as we get thru the supply and currently less-than-optimal seasonals that stack up against the bond market. We’re trying to think like Buffet and skate to where the puck is gonna be. Actually that’s more like Gretzky than Buffet, but whatever. We’re NOT thinking about stocks but Tsy supply. We can envision wanting to come out of the November refunding supply (which will most likely include 3yr notes) more long than not. This may go against our steepening bias and we’ll address this in due course. For now, though, in as far as what’s on OUR mind? Think steepening curve trades.


Now, in as far as the tactical vs strategic lesson we’ve learned recently … we had another idea up on our webpage a few days ago wherein we liked TIPs (and break-evens). For the what it’s worth column, we’d treat any and ALL ideas at the moment as tactical (ie trade em when you’ve got profits, and look to re-enter with cushion) but the bigger picture thinkers out there may stick to strategic trades as such. This one’s NOT working at the moment but we cannot help but think it’s truly the fixed-income markets version of Buffet buyin stocks a few weeks ago. Given just how many acronyms the Fed’s come up with and the amount of research available ‘out there’ regarding quantitative easing (which as we understand it, is what’s NEXT, after ZIRP), we can only suggest that the Fed will get exactly what they are after, eventually. Namely a more healthy and profitable banking sector AND INFLATION. That being said, here’s a look at 10yr TIPs ‘break-evens’. This in mind, we can take some degree of comfort in that we are fighting the same fight that the 800lb gorilla in the room is fighting, namely PIMCO. Here’s link to article in today’s WSJ suggesting they too like the TIPs space. We’ ALSO mention that IF you scroll just below to the items WE thought worthy in the press, you’ll note an item from Barrons … Maybe thats the only thing working against the trade at the moment? Donno. All good and supportive food for thought, though.

Items Of Interest: 


Bloomy’s Econ Calendar October 29th


Bloomy’s Fed-speak Calendar October 29th


GPs Key Econ Indicators October 28th, 2008 -> Our “Economic Graph Package” is used by some of our clients to include in their monthly or quarterly reports. We have most of the major economic indicators included to give an accurate snapshot of the economy.


GPs 5yr & Under Summary October 27th, 2008 – > This is our chart package we call the “One to Five Year Daily”. It tracks agency bullet spreads to Treasuries, date to date, to compute the real maturity spread levels (in basis points) out to five years. We track agency callables against agency bullets and Treasuries. We compare equal maturity dates when tracking these spreads because the effective durations of callables are not stable. So over time we have a consistent methodology that we use to determine “value”. Please give us a call for more in depth explanation.


GPs Index Spread Summary October 28th, 2008 -> We use certain Merrill Lynch indices, which are described at the top of each graph, to try and determine optimal entry and exit points for each sector. Though the indices should have similar durations, they commonly don’t match precisely so we’ve included the green line (which should be read off from the right axis) to allow you to take the curve into account when looking at historical spread relationships.


GPs Daily Pivots October 29th, 2008 -> The pivot point is essentially a mechanism for analyzing the short-term supply and demand factors affecting the market. It has limited applications for long- term decision making. Professional futures floor traders, also known as locals, are the biggest proponents of the pivot technique. Scalpers, brokers, market makers, and other short-term traders also use the technique, while upstairs or longer-term traders occasionally look at the pivot for ideas of what the floor traders are doing. The pivot point is basically the weighted average price of the previous trading day, calculated as the average of the previous trading day’s high, low, and closing prices. It represents the major point of inflection each day. Unless there has been significant market news between the previous trading day’s close and the current trading day’s opening, locals often try to test the near term support, resistance, and pivot point. For example, many floor traders cover their shorts and go long into the pivot level if the market opens above the pivot point and starts to sell off.


StreetStuff – WEEKLY – October 27th


StreetStuff – October 29th

  • DB: As go consumers, so goes the economy
  • DB: Fiscal outlook deteriorating – The global recession will substantially reduce government budget positions due to both cyclical effects and the likely massive fiscal stimulus that will be needed to jumpstart stagnant economies.  As a result, we see the US budget deficit exceeding 7% of GDP in 2009 and 6% in 2010; for the euro area we see the general budget deficit pushed to 5% of GDP in 2010. Capital injections in return for equity stakes and purchases of distressed assets raise government debt issuance temporarily (until the assets are sold).  They will raise the national debt permanently to the extent that losses are booked on the assets sold.  But these transactions will not significantly affect current government expenditures or the budget deficit on a national income accounts basis, which is most relevant to our view of prospects for GDP growth. 
  • GS: How Low Can the Funds Rate Go? Although a 50-basis-point (bp) rate cut on Wednesday remains our baseline expectation, a more aggressive 75bp cut has greater likelihood than currently discounted in the market.  The main argument for a bigger move is that financial conditions since the September 16 meeting have tightened by more than in any intermeeting period since 1981. While many of the arguments against a larger move are unconvincing, the one good argument–and the reason why we have not yet shifted to a sub-1% funds rate forecast for either this meeting or beyond–is that Fed officials probably worry about systemic problems in the money markets that increase as the funds rate approaches zero.  But we are unsure just how large these concerns loom in their minds, and this introduces significant risk to tomorrow’s rate decision in the direction of a 75bp rate cut.
  • ML: October 29 FOMC Scenario Analysis – The Fed is most likely, in our opinion, to ease by 50 bp at the October 29 FOMC meeting
  • ML: Turning Japanese, I really think so – Macro backdrop looking more like JapanThis is America, but the problem is that the macro and market backdrop is looking more like Japan than we would have liked or expected. (We published our inaugural report on comparing the US and Japan post-bubble experience back on July 9th, 2008, titled Supply > Demand = Japan? The S&P 500 declined 32% since we published that report). While the US has superior (though still aging) demographics and policymakers have responded more quickly (but how effectively is open for debate), one critical difference is that the Japanese have always been more minimalist by almost any metric than what the American consumer became at its apex over the past several years.
  • BofA: Fed likely to lower funds rate target to 1% tomorrow – The prospect of continued very weak economic releases, an increasingly international dimension to the economic and financial crisis and continued extraordinary volatility in financial markets will likely convince the Fed to lower its funds target a full 50 basis points to 1% tomorrow afternoon.
  • BofAs Situation Room: Last Hour Matters Most – Again, the last hour of trading determined the close as stocks ended up sharply, reversing the previous day’s last hour swoon. And as we highlighted yesterday, liquid credit indices as they are apt to do followed, ending the day 12 bps tighter. Credit market conditions continued to show signs of improvement as LIBOR continued to reset lower and the impact of the launch of the CPFF as we highlight below, appears in the expansion of CP issuance on Monday.


Technicals – October 29th

  • JPM: Expecting 3.86-3.90% Short Term Support to Hold For Now – Cash Tens- Go 25% Long near 3.845-3.86%. Add 25% 3.90-3.91%. Risk 3.925%. Exit amid 3.75-3.71%.
  • CSFB: Reinstate a long at 114-16/08, stop below 114-06. Also add to longs above 115-16 for a move to 116-16/20. Reverse longs here, stop/reverse above 116-27, as a break can target 118-00. Below 114-06 would warn of a slide back to 113-11/01. Retry a long here, stop below 112-27.
  • BarCap: Increasing risk for a correction – US Treasuries – 10s and 5s: Why we do not think one should be bullish 5s short term; Eurodollars and Cash 2s: Though counterintuitive, a bearish case builds for cash 2s
  • GS: Schatz yields still extending lower towards 2.00%


In Press NOW:


Up & Down Wall Street Daily – WEDNESDAY, OCTOBER 29

A Hot TIP — Without the Risk Inflation-protected Treasuries could provide double-digit returns if normalcy returns.


  • Consumers Feel the Next Crisis: Credit Cards By ERIC DASH After years of flooding Americans with offers and high limits for credit cards, lenders are cutting back sharply on both.
  • Are Stocks the Bargain You Think? By DAVID LEONHARDT The bears, who say that stocks are overvalued long term, do have a valid argument. Based on numbers and history, it has at least as much claim on reason as the bullish argument does.

FT Home



This entry was posted in Bond Beat News. Bookmark the permalink.