Bond rally nearing an end?

And today?

 

That's what they said in the statement. Or actually wanted to say in the statement according to the minutes. But did not officially release. And, didn't the market sell off on the release of the minutes too?

A several day rally in short term rates doesn't really mean anything. They have been rising, parabolically, since the spring of 2004. If they had dropped 25 basis points or so. That would be a different matter.

I like Steve's analogy: markets are in the martini shaker

 

Probably for another two weeks.

 

Interesting TIP auction: Dealers took down a whopping 64% of the 5yr issue, last year they only took down 36% of the same issue. It would appear that mcurto’s report yesterday of JP Morgan’s 5yr note/3yr bundle sales was prop traders seeing weak demand for the auction(s)? I’ll bet that the Thursday 5yr auction will be a classic sell rumor/buy fact affair.

Oh yeah, the TIP coupon was +118bp over last year. A fine example of the FOMC’s ‘contained inflation expectations’. What a joke.

 

Last rally was pure short covering:

Monday
15:21 ET

Treasuries Tick Higher Heading for Data Days: The market pushed better but could not hold on to all the gains, slipping back-off a bit later in the session on light, lacking action. The trade was driven by some short-covering & the recent tumbling in prices helped pique the interest of some buyers. The market will look to snag some follow-through overnight, but action will likely remain cautious.

 

JohnL,

Yep, the JPM 5yr futures/3yr bundle stuff was most likely auction related. The 5yr futures started trading size around 1pm central today again, about 20,000 from 27.5 up to 29.5 (same time yesterday). Heard the 3yr bundle started trading again around the same time over in the back month pit (they bought back 3,000 or so). Definitely looks like these two trades are related and about half unwound today.

 

I just posted this on my blog:

"At 10AM the consumer confidence figures were announced, and surprisingly they were the highest in five years. The bears took the opportunity to sell everything: bonds, stocks and crude. The logic, if one could call it that: if consumers are too confident, inflation will rise up and interest rates will rise higher, choking the economy into a recession. Interesting, I thought that when consumers are pessimistic we have recessions.

If you recall, five years ago is when the markets were fairly close to the end of that nasty super cycle bear market. Wasn't the consumer optimism the first sign of an economic recovery in 2002? If so, shouldn't it now be considered the sign of a resurgence in the economy after the Katrina effects? Long term interest rates are rising because they are still at nominally low levels. Remember what happened in real estate when they were too low? Short term rates are rising because of the fear a potential rise in inflation. Short term rates have risen 4% in the past two years with little impact on the economy, because they too were at nominally low levels.

In summary: rates will rise further, the economy remains strong, and earnings will continue to come in at record levels. And Exxon will show a quarterly net profit on thursday higher than most public company's total yearly revenue: $9 billion, and that includes Google!"

 

Tony -

Isn't that the crux of everything?
The economy remains strong even in the face of a doubling or tripling of oil/gas over the last few years. However, structural inflation has now been built into the system.

If you read a number of Pabst and my own previous posts, we both have concluded that there were massive deflationary tendencies in the market following the dot com bust and the confidence wallop of 9-11, which were further fueled by the ridiculous dollar pegging of the yuan and the wal-mart / china effect.

It would seem that the massive structural inflation introduced into the system by today's oil scenario has at least temporarily defused the deflationary one (in deference, but opposition to gary schindling's writings). The regime change of BSB for Greenspan, along with the discontinuance of M3, has some interesting effects of prompting a natural resources boom as both investors seek hard assets and asia's booming economy wants them too, as well as devaluing the USD, largely on fear - though this does start to help to solve china's massive currency peg by putting the screws on them somewhat (fine - your treasuries maintain their value relative to the dollar, but are cow dung relative to the rest of the world. And we are still NOT going to allow you to purchase any natural resource firms in the USA.)

Easy to have rising revenue when fixed debt is being paid with cheaper dollars and FX reciepts remain strong, and price increases are built in due to inflation. As long as there is no WAGE INFLATION, everyone is hunky dory (at least from the fed's perspective). Except banks, and they'll raise their rates too, although I think that the banking sector will underperform for a while more as a result.

SO, you'd have to be nuts to be long the long bond!

And that H&S on the Euro/$ is holding for now.

Exciting times, no?

I should have added to my short 30 year position, but will wait for now.

 

Hi doc,

What you are stating makes sense.
There were strong deflationary pressures after a supercyclical collapse in paper assets. There always is!

With this reinflation scenario, it took time for some countries to make the necessary adjustments. Which they have done.

As for the worlds consumer the U.S. These countries are very happy we're buying their products. If we pay them back with cheaper Dollars, they will just come here and buy all our commercial real estate. So, if we want to auction off our prime land to the highest bidder, it's our own fault.

Turning paper assets into hard assets defeats devaluation.

 

Actually, the japanese tried that b4. I seem to recall the uproar over them buying rockefeller center... then we bought it back from them years later for nickels on the dollar.

I think that purchases of assets by extranationals is encouraged, so long as:

1. Those assets aren't hard
2. If hard, those assets aren't fully controlled.
3. they don't have any national security issues
4. they are not 'irreplaceable.

Fine with me if they want to drive up rents in NYC. But don't blame me if your primary tenants all relocate to Jersey City, etc...

I don't think we are really auctioning off our prime land except at inflated rates. Could be wrong - haven't looked at it to be honest. Not sure it is particularly such a bad thing either.

And yes, turning paper into hard assets defeats many things. The question is - when?

(not yet, IMHO)