Greenspan is getting ready to retire, imho, and he doesn't want to go out with a weak economy. Inflation looks dead, at least the way its reported and deflation looks to be in check....for now. I say he cuts 50 bp just for a little insurance. Look what happened to Japan by not cutting aggresively at first signs of deflation.
There have been several articles in the WSJ about how money market funds may begin to have a negative yield after expenses or the sacred NAV will have to go below 1.00. If you had money would you: buy bonds at these levels? buy stocks at these levels? stay money market and get your $30 a month at 00.8%?
The Fed almost always does exactly what the Fed Funds futures indicate it will do. Not because the Fed follows the Fed Funds futures, but because the Fed guides the market to anticipate what the Fed has decided to do. That means a cut of at least 25 bp and maybe 50bp. That could change before the meeting. John Berry of the Washington Post has among the best access to the Fed. His columns say what the Fed will do. If the Fed did differently, the market would be shocked -- not what Greenspan wants. See below. Sunday, June 15, 2003; Page F09 Bonds Yields on Treasury securities fell last week to lows not seen since the 1950s. Bill yields fell to well less than 1 percent, and an investor had to go out to five-year notes to find a 2 percent return. A 10-year note brought only a 3.11 percent yield. The incredible drop in yields was the result of several developments, including a rising conviction that Federal Reserve officials are likely to cut their 1.25 percent target for overnight rates by 50 basis points on June 25, continuing worries about whether economic growth will accelerate as predicted in the second half of the year and, finally, the uncertainty created about Fannie Mae and Freddie Mac securities by the abrupt dismissal of the three top executives at the latter. According to interest-rate futures, investors put a slightly higher probability on a 50-basis-point rate cut than a 25-basis-point cut, but one or the other appears certain, given comments by various Fed officials. Tomorrow, Treasury will sell $18 billion each in three- and six-month bills, both of which yielded 0.84 percent in when-issued trading Friday. Also tomorrow, Treasury will announce details of an auction of four-week bills to be held Tuesday. -- John M. Berry
we are already headed towards higher inflation, the whole delflation BS is pure propaganda, just like the "strong dollar" talk. Interest rates will stop dropping soon, we may have seen the last rate cut already. The Housing market will not CRASH, It will CEASE OPERATION. Prices will not drop, there just won't be any people willing to pay the prices. People will not lower the prices, because they have huge mortgages to cover somehow.
So all those polls showing Bush winning in a cakewalk are just made up? Not only will Bush win easily, but the Republicans will expand their slim majority in the Senate. All this does lead to a perplexing question, why more rate cuts? If all the cuts we've had haven't turned the economy around, I really doubt one more, particularly when it's obvious it's the last, will do the trick. To ensure there is no deflation? The deflationary threat largely stems from excess manufacturing capacity in Asia in things like chips and cell phones that no one needs. I doubt the Chinese will start shutting factories because we cut rates. Even the spectre of a major screwup at FRE or FNM that has been hidden sounds dubious. They are hurt by falling rates, as mortgators refi and they are forced to reinvest at lower rates. Maybe they are trying to hold down government borrowing costs in advance of having to float a lot of bonds to finance the deficit. Or maybe there is somethingout there we don't know about, like some potential derivatives meltdown.
I hope that President George W. Bush gets re-elected in 2004. He has been a great leader of this country during some really tuff times. But, Bush is getting blamed unfairly for the current economic/jobless environment. People have to realize and comprehend the "Business Cycle" of the U.S. and the World. Too much excess and overoptimistic expectations built up during the 90's, Internet Bubble, Y2K Spending, Corporate Fraud, etc... It has taken an number of years to finally get through all the bad excesses and corporate garbage, not to mention the heighten geopolitical dramas being played out all over the World as we speak! The economy here in the U.S. has held up pretty well since 2000. With the Fed aggressively lower interest rates, helping to improve peoples and corporate balance sheets, the re-flationary process has just began...ala early 90's . This time however, the Treasury Department should be aggressively locking in low borrowing costs by issuing huge amounts of 5's 10's and yes 30 year bonds. The government is going to need it anyway, because of the large budget deficits that have and will occur as a result of higher federal spending. Good Times Are Ahead.
fathom a guess as to where the 5 , 10 , 30 yr basis sep futures on the CBOT should be or where the cash 30 yr $TYX index should be in terms of price to cover a 25 bp cut ?
my guess: "Buy the Rumor, Sell the Fact" The bond market participants have been buying the "rumor" since the FED's May 6th meeting and thier jawboning concern about deflation. I would expect the bond market will sell off on the news announced by the FED on their next meeting June 24-25th whether its a rate cut or not! The 30yr basis Sept. has been selling off the last 3 days. Simple retracement of the 108-08 low in march and the 123-02 high on 6/16 are as follows: .382%= 117-13 .500%= 115-21 .618%= 113-29 Good Luck
Reflexive makes a good point. The government should be scooping up money at these rates, unless they know something we don't. The ownership statistics on governemtn bonds are interesting. I'm not totally u[ on it, but my understanding is that a substantial percentage og bonds are owned by foreign governments, eg Japan and China. They are more or less forced to buy bonds, otherwise their huge trade surpluses would cause their currencies to get so strong it would hurt their competitiveness.
since we are going to be running deficits this year and next at least, the government IS going to be scooping up money and locking in historically low interest rates. The Fed is pumping money into the system in order to keep the public money supply growing in spite of the larger government bond offerings. The eventual price for all this government interference in the markets and the economy is reduced buying power of the dollar. However, we have successfully avoided a Depression, and Bush has a decent chance of being a two term president.