Riddles

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 bankrate.com, 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 辻?) 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.