Bond Market, Interest Rate's & Foreign In-Flow Intelligence Report
My take is that beyond housing, labor costs are the most important piece of the inflation puzzle for the Fed.
Labor costs will continue to be pushed up by rising housing costs and energy costs in the chain, unless something is done. If the overall CPI, PPI & core (ex energy) measurements continue to increase, labor inputs will continue to increase.
This would force the Fed to keep raising the lshort term rate and potentially invert the yield curve before summer. The Fed wants to avoid this occurance at all costs.
A strong dollar would come to the Fed and economy's aid by continuing the pullback in energy & commodity prices and keeping labor input costs stable. A strong dollar buys the Fed more time as well.
For what you ask? So they can pause this summer on low end rate increases, but don't be suckered in and lulled to sleep by this move, why? Now its time to pay attention boils and ghouls because this is where the thlot plickens...
The recent bond party, April & May i.e. the big flight to safety in Treasuries, has the 10yr to 30yr gap hovering about 50 basis points. This is a big red flag as the yield curve is dangerously close to flat and could invert with another 25 basis point bump by the Fed.
According to TIC data, foreign capital inflows (foreign bank & hedge fund purchases)slowed in March. Net domestic securities purchased fell to $60.1 billion in March from $98.1 billion in February.
TIC inflows are down, yet the dollar went up and plenty of Treasury debt was purchased. If not FCB's then the Boyz from Bermuda (Hedge Funds) and private Asian investors (Japanese retirees) must be propping up the dollar and buying the Treasury debt. Right? Let's see.
Foreign central banks sold net -$14.4 billion in overall U.S. securities, the first net sales since August 2003, after purchasing net +$18.7 billion in February. Thats a $33.1 Billion net swing in one month.
Foreign central banks sold net -$15 billion in Treasury issues in March after buying net +$11.3 billion in February. It's the first net sales of Treasurys by the official foreign sources since August 2003.
Chinese holdings (both official and private) of U.S. Treasurys dropped for the first time in just over a year. Japanese holdings fell for the second time in the past three months. Hedge funds in the Caribbean increased their holdings by 31%. Well, there you have part of it.
Interestingly enough, Government Agency Bond sales such as Fannie & GSE issues went from 6.1B in Jan, to 5.2B in Feb, to 1.0B in March. This signals less enthusiasm on the part of foreign investors in our bubbling housing market debt issues. Do they know something we don't?
Private foreign demand held up better in March. Net purchases fell to $74.5 billion in March from $79.4 billion in February. Private purchases of Treasurys rose to $42.9 billion from $31.2 billion, there's the hand of the private Asian investor!
Net purchases of U.S. equities fell to $1.7 billion from $7.4 billion. These numbers go a long way to explaining the behaviour of the stock market and bond prices in March. Stocks sold off, bond prices went down and yields went up.
It will be interesting to see the April and May data, with a stronger dollar and the two falsely rumored unpeggings of the RMB causing a temporary jump in the Yen triggered more buying of treasuries during those periods, driving down rates. Me thinks these were test rumors to see how the markets would react.
To answer the question posed earlier, the Fed needs to wait out the 2nd quarter "soft patch" this summer. It's a scheduling thing you see.
In August the Treasury will officially announce the return of the 30 year bond auction in January 2006. That is when the herd that has been spooked into the safety of bonds gets slaughtered, as the existing base of 10 year debt gets flattened.
Insurance companies, banks, foreign banks and pension funds will divest of 10 year debt and snatch the new 30 year issue up. Also around this time, China will announce a floating bandwidth +/- 5% yuan(RMB) unpeg from the dollar.
This will increase the RMB and all Asian currencies, hint hint, the Yen against the dollar and euro. Keep in mind, the dollar won't go down, the Asian currencies will go up. This gives a slight boost to all exporting countries.
More importantly, it allows China and Japan to raise their interest rates in lock step with ours. The 5% increase puts a 5% off sale sign on the US and Europe. A hot rush of Asian money makes its way into our asset markets as well as the 30 year bond issue.
In addtion, by the time the fallout from the bond market occurs, the 3rd quarter economic numbers will recognize a strong undercurrent that is already underway. All of this allows the Fed to drop the word measured and start raising rates again. Strengthening the dollar further and cooling the inflation.
The overall effect on the 10 & 30 year rates will put the yield curve back where it needs to be. This will release the squeeze on the financial sector, to make money on increased rates and margin. Add the margin players money to the Asian money during a 5% off sale.
Last year and this year, George Soros, Bill Gates, Warren Buffet and Bill Gross all publicly jumped off the short the dollar bridge. Isn't that special? Funny thing, how the dollar has gone up since year end. Makes one wonder what they actually did privately?
Now, Bill Gross is saying that the 10 year will be 3% by the end of 2006. That would make todays 4.11 rate look high and spur a flight to safety before rates go lower. Isn't that extra special?
So kiddies, get ready for a late summer bond market slaughter, higher short & long term rates by year end, the silence of the housing market lambs, a sudden late year spurt of domestic economic activity, a stronger dollar, yen and RMB, and lower oil & commodities costs.
Its the only way out of the corner that the Central Banks have painted themselves into. Just my opinion, I too could be "grossly" wrong. No pun intended.
Treasury TIC Data
Labor costs will continue to be pushed up by rising housing costs and energy costs in the chain, unless something is done. If the overall CPI, PPI & core (ex energy) measurements continue to increase, labor inputs will continue to increase.
This would force the Fed to keep raising the lshort term rate and potentially invert the yield curve before summer. The Fed wants to avoid this occurance at all costs.
A strong dollar would come to the Fed and economy's aid by continuing the pullback in energy & commodity prices and keeping labor input costs stable. A strong dollar buys the Fed more time as well.
For what you ask? So they can pause this summer on low end rate increases, but don't be suckered in and lulled to sleep by this move, why? Now its time to pay attention boils and ghouls because this is where the thlot plickens...
The recent bond party, April & May i.e. the big flight to safety in Treasuries, has the 10yr to 30yr gap hovering about 50 basis points. This is a big red flag as the yield curve is dangerously close to flat and could invert with another 25 basis point bump by the Fed.
According to TIC data, foreign capital inflows (foreign bank & hedge fund purchases)slowed in March. Net domestic securities purchased fell to $60.1 billion in March from $98.1 billion in February.
TIC inflows are down, yet the dollar went up and plenty of Treasury debt was purchased. If not FCB's then the Boyz from Bermuda (Hedge Funds) and private Asian investors (Japanese retirees) must be propping up the dollar and buying the Treasury debt. Right? Let's see.
Foreign central banks sold net -$14.4 billion in overall U.S. securities, the first net sales since August 2003, after purchasing net +$18.7 billion in February. Thats a $33.1 Billion net swing in one month.
Foreign central banks sold net -$15 billion in Treasury issues in March after buying net +$11.3 billion in February. It's the first net sales of Treasurys by the official foreign sources since August 2003.
Chinese holdings (both official and private) of U.S. Treasurys dropped for the first time in just over a year. Japanese holdings fell for the second time in the past three months. Hedge funds in the Caribbean increased their holdings by 31%. Well, there you have part of it.
Interestingly enough, Government Agency Bond sales such as Fannie & GSE issues went from 6.1B in Jan, to 5.2B in Feb, to 1.0B in March. This signals less enthusiasm on the part of foreign investors in our bubbling housing market debt issues. Do they know something we don't?
Private foreign demand held up better in March. Net purchases fell to $74.5 billion in March from $79.4 billion in February. Private purchases of Treasurys rose to $42.9 billion from $31.2 billion, there's the hand of the private Asian investor!
Net purchases of U.S. equities fell to $1.7 billion from $7.4 billion. These numbers go a long way to explaining the behaviour of the stock market and bond prices in March. Stocks sold off, bond prices went down and yields went up.
It will be interesting to see the April and May data, with a stronger dollar and the two falsely rumored unpeggings of the RMB causing a temporary jump in the Yen triggered more buying of treasuries during those periods, driving down rates. Me thinks these were test rumors to see how the markets would react.
To answer the question posed earlier, the Fed needs to wait out the 2nd quarter "soft patch" this summer. It's a scheduling thing you see.
In August the Treasury will officially announce the return of the 30 year bond auction in January 2006. That is when the herd that has been spooked into the safety of bonds gets slaughtered, as the existing base of 10 year debt gets flattened.
Insurance companies, banks, foreign banks and pension funds will divest of 10 year debt and snatch the new 30 year issue up. Also around this time, China will announce a floating bandwidth +/- 5% yuan(RMB) unpeg from the dollar.
This will increase the RMB and all Asian currencies, hint hint, the Yen against the dollar and euro. Keep in mind, the dollar won't go down, the Asian currencies will go up. This gives a slight boost to all exporting countries.
More importantly, it allows China and Japan to raise their interest rates in lock step with ours. The 5% increase puts a 5% off sale sign on the US and Europe. A hot rush of Asian money makes its way into our asset markets as well as the 30 year bond issue.
In addtion, by the time the fallout from the bond market occurs, the 3rd quarter economic numbers will recognize a strong undercurrent that is already underway. All of this allows the Fed to drop the word measured and start raising rates again. Strengthening the dollar further and cooling the inflation.
The overall effect on the 10 & 30 year rates will put the yield curve back where it needs to be. This will release the squeeze on the financial sector, to make money on increased rates and margin. Add the margin players money to the Asian money during a 5% off sale.
Last year and this year, George Soros, Bill Gates, Warren Buffet and Bill Gross all publicly jumped off the short the dollar bridge. Isn't that special? Funny thing, how the dollar has gone up since year end. Makes one wonder what they actually did privately?
Now, Bill Gross is saying that the 10 year will be 3% by the end of 2006. That would make todays 4.11 rate look high and spur a flight to safety before rates go lower. Isn't that extra special?
So kiddies, get ready for a late summer bond market slaughter, higher short & long term rates by year end, the silence of the housing market lambs, a sudden late year spurt of domestic economic activity, a stronger dollar, yen and RMB, and lower oil & commodities costs.
Its the only way out of the corner that the Central Banks have painted themselves into. Just my opinion, I too could be "grossly" wrong. No pun intended.
Treasury TIC Data
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