Friday, March 26, 2010


Q. What's big red and ugly, and has a long tail?

A. A US Treasury auction!

Last night's 7 year auction went just as poorly as Wednesday's 5 year, and while the downside follow-through in bond prices wasn't quite as bad as for the 5 year, that might simply be because Rip van Winkle the stock market finally noticed what was going on with bonds and performed a late-session swoon.

While the sell-off in bonds certainly raises challenges for both equities and growth, particularly if it is sustained and extended, at this juncture it's probably important not to over-dramatize things. Mortgage rates have held pretty steady; indeed, in the case of conforming 5/1 ARMs, according to, rates are more or less at their lows.

Q. How is Greece like a submarine?

A. People will only lend a hand when they're deep underwater.

So the EU has finally come up with a mutually-acceptable "plan" for Greece...though it didn't take Trichet long to put one in his own net by having a moan about IMF involvement on French TV.

While the details of the plan are still pretty murky, it is pretty clearly not a "bail out"...after all, you can only bail out a boat before it sinks. Rather, it seems as if it is more of a submarine safety net, designed to catch most of the collateral flotsam and jetsam should the Good Ship Greece go down (or, more to the point, should one of their bond offerings not go down.)

So what we're left with is an exercise in game theory. Greece will only get help if they cannot raise money/roll over their debt. Does that knowledge a) comfort the market in knowing that there is some sort of liquidity backstop, thus emboldening investors to
purchase Greek paper? The extension of the ECB minimum collateral threshold will also help in this regard. Or b), will the market now have a target to shoot at, knowing that the only way to get some sort of action on Greece is to shoot down one of its titanic auctions with all hands on board?

The initial reaction appears to be "a"; 5 year Greek CDS is currently 300 mid, down 15 bps or so from yesterday's close. But Macro Man wouldn't be surprised if the market doesn't have a go at probing scenario "b" at some point in the not-too-distant future.
Q. What's big and has loads of money and buys the snot out of USD/JPY at the direction of the MOF and definitely won't let us see 90 again?

A. Well, not the BOJ, because that would be intervention, and no other Japanese institution is allowed to conduct intervention.....right? Right?

Well, wrong, if the popular scuttlebutt, stirred up by an article in the Nikkei, is true. Word on the strasse (or is that the ?) is that Japan's Post Bank has been hoovering USD/JPY at the direction of MOF mandarins in a campaign of stealth intervention.

It would hardly be surprising, given that Japan is a) still looking pretty tepid, recovery-wise, and b) if they engaged in overt intervention, they would have some 'splainin' to do to an irate US Treasury and Congress.
Regardless, everyone's favourite trade is now back on the radar, helped, no doubt, by the sell-off in US fixed income. Current levels are something of a no-man's land, especially with just a few days to go until fiscal year end (with the assumed HIA yen-buying associated with it.) More than just about any other currency pair, USD/JPY has flattered to deceive over the last year.

If you can solve the riddle of when it will start performing sustainably...well, that'll be worth quite a bit more than a groan and a laugh.


AD said...

notwithstanding a rally in fxd income (after recent pain), perhaps the reason why equities is so oblivious to what's happening in yields (and eurchf and ussp10) is because this grind/rally higher isn't at the cost of the dollar.. USD is rallying WITH equities.. usually when its "risk on" (-usd/+risk) and there is trouble in the bond markets, ripvanwinkle equities tend to wake up.. perhaps dollar strength is helping the equities lot ignore what's happening in fxd income...? or maybe that makes no sense... sigh.

Eddie Bravo said...

word on the 通り not word on the 辻 but yeah, wouldn't be surprising...

Macro Man said...

AD, looking across markets: higher stocks, higher dollar, higher US yields, the Occam's razor expalnation is that markets are pricing in- believe it or not- a re-rating of US growth prospects. A scary thought and surely worthy of a fade sooner or later!

Eddie, yeah well, what can I say, my Japanese falls over pretty quickly after "ni-han birru".....

Nemo Incognito said...

Could also be explained by a CNY reval, which would mean all CNY crosses go up, hence US growth picks up. Does not explain good performance of USD vs $Asia though...

AD said...

for equities.. over easter.. path of least resistance is up I'm afraid. Long cash/short index has hurt real money.. and will continue..

deke said...

after yest. auction it looked like ES NQ finally realized the bond mkt moving so hugely could not be a good thing...

..and had a delayed reaction to the healthcare bill: Consult Towers Watson said that the new law will cost corporations $14 bln in profits. CAT announced a $100 mln charge and DE announced a $150 mln charge. The added expense is due to the fact that Medicare D cannot be deducted.

the euro has basically fulfilled the '5MA touch' trade at today's high


Tyler said...

Yes, mm, Occam's razor could very well be at play here.

Are you certain it is such a scary thought though and 'surely' worthy of a fade? what if growth actually does surprise on the upside of depressed expectations? If we view the politicians et al as managers of a company, they could be creating the equivalent of a kitchen sink quarter/year. 'growth will be subpar and unemployment will stay high for a while, growth will be subpar and unemployment will stay high for a while, growth will be subpar and unemployment will stay high for a while, growth will be subpar and unemployment will stay high for a while,

Sure, it is tough to mount an argument against it, but it just feels a bit like truth by repetition, while some of the data is showing that the economy is gaining momentum.

AD said...

depressed expectations largely, 'cept on payroll data.. everyone expects 3 months of +ve payroll data.. not much risk on the upside there...
Risk to equities is STILL exogenous.

Leftback said...

Looking at this through the FX lens. EoY Japanese yen repatriation about to end... and yes, you're right, Japan is engaged in a clandestine program of mini-QE by selling yen to combat continued deflation.

Looks like April is going to begin with another burst of yen weakness that will be positive for carry traders and the commodity stocks. So, LB agrees with AD. Q2 can start out equity positive, but eventually the stronger dollar will catch up with commodity markets.

With regard to Treasuries, MM, let's say that Voldemort wanted to give Timmy the finger regarding US comments on yuan revaluation and stayed home from the auction. Now, given that the Dark Lord's holdings include large UST positions, this kind of behavior is somewhat self-limiting, no?

k1 said...

Interesting observation about China and the auctions, LB. I was wondering something similar yesterday as well. The thing I really start to wonder is: how long can they hold their breath against the massive inflow of USD from the trade deficit? And thus, where might one consider placing that trade?

Leftback said...

Good question, k1. No idea, but I wonder if the absent buyer was really China? It is Japanese EoY, after all so they are not going to be buyers.

Here are four commentaries on the week:

FWIW, I agree with bond guys 2, 3 and 4.

The RBS guy really seems like a brainless tool - trying to score cheap political points about health care, which is odd for a trader for a British bank, but there you go. He's probably ticked about his 2009 micro-bonus.

k1 said...

Thanks for the link, LB. Very entertaining. I presume you have also seen Rosie's observations as well, reproduced far and wide.

Japanese EoY, China petulance, poor seasonality for USTs in general, sounds like a tremendous opportunity setting up, which will bear some watching.

econobserver said...

Well, China has hinted that there is going to be trade deficit for China first time in many years in March. If it is true, then it is a strong excuse to stay out of U.S. bond auction for a while: China can keep trade deficit for a few months. Last year trade surplus did not contribute much to GDP growth so small deficit could come in handy right now.

Leftback said...

Another problem for Voldemort.

China Housing Crash Ahead?

Nemo Incognito said...

That's an old article FYI.... I am still a subscriber to the Rick James theory of Chinese real estate: much like Rick James, China will continue to get super dooper loaded so long as there is capacity to do so: monetary in the short run (credit growth) and the fiscal capacity to do so in the long run (bank bailouts). If that ceases to be, its going to be a long way down and if they overstimulate and get urban unrest its heart attack time economically.

Question is, how much is left of that 8-ball?

deke said...

wow, gold sure proved that it can move off any threat of 'war' out there in the world, as crude oil was doing zilch friday

crude oil had that range say 35-148 so that gives a .382 about 78.3 which is also currently the 50MA zone, depending on the chart you are using

crude oil has that great positive seasonality that began about mid feb. continuing thru april

crude oil normally rules the commodity and commodity currency roost, so it was unusual for gold to go it's own way friday

treasuries ought to go touch their 5MA's soon


Pascoe said...

Interesting study on effects of overt vs covert operations by the BoJ (well I thought it was anyway).

All makes sense to me. No point waving a red rag at a bull.