[[wysiwyg_imageupload:2232:]]By Levente Mady
The bond market retained its solid bid again last week. Another Fed meeting and another Treasury debt auction cycle could do not a thing to dent the spirits of Treasury Bond buyers. While the QEII program continues to sop up some of the supply and - contrary to popular belief - the foreign Central Banks continue to buy bonds, at the end of the day there were more than enough additional buyers to keep the prices moving higher. Excess liquidity still seems to be abundant as stocks, bonds, precious metals, foreign currencies, etc. all continue to march higher.
Last week it was the Fed’s turn to have a policy meeting that told us absolutely nothing new. They can’t lower rates any further, so they didn’t. And thank goodness they did not raise them either as me munching on my shorts was a potentially ugly prospect. They also decided to stick with wrapping up QEII in June as previously advertised. As for the press conference after the meeting, I have 2 quick comments to make. First, certainly nobody can say that the Bernanke Fed is anything but transparent. Chairman Bernanke and the rest of the gang are doing a stellar job of operating with a “no surprises” mantra. Second, I sat there watching in disbelief as the Chairman repeated several times that the Fed, the Treasury, the Administration and the Boys’ and Girls’ Club of Tontitown, Arkansas (population approximately 1,000) all believe that a strong US Dollar is in all of America’s best interest. The financial markets sure did not seem to be impressed. Silver rocketed about 4$ and the Dollar Index was off over a point in just a few short hours after the press conference. As John MacEnroe was once heard saying: You cannot be serious!
One thing just seems to be more and more apparent: the Fed has no plans to raise interest rates pretty much into perpetuity it looks like. They also revised their economic growth forecast down and their inflation forecast up. I would suggest that their downward revised 3.5-4% growth forecast for the next 3 years is somewhat overly optimistic, but we were also told that the number one objective remains to get the Unemployment Rate below 6% regardless of the costs associated. So expect QEIII, IV, XV and so on at any sign of a slowdown.
NOTEWORTHY: The economic calendar was disappointing last week. The Housing sector reports actually managed to exceed the dismal forecasts again, but in spite of that, there is still not a lot to cheer about in that sector at this point. New Home Sales managed to bounce 11% to 300k, but house prices remain under pressure. The latest data shows that the Home Price Index declined 3.3% over the past 12 months. Pending Home Sales also managed to increase 5.1% in March. Consumer Confidence increased 2 points to 65 on the Conference board survey while it dropped 3 points to 67 on the Michigan survey. Consumer Confidence remains at recessionary readings. The Fed’s regional Manufacturing surveys have been declining from pretty lofty levels. Durable Goods Orders increased a respectable 2.5% on the headline and 1.3% on the core measure. First quarter real GDP was reported mostly in line with market expectations at 1.8%, but the nominal figure of 3.7% was over half percent lower than forecast. This kind of growth will not get us to 6% Unemployment any time soon… Weekly Initial Jobless Claims increased 25k to 429k from an upwardly revised figure, and remained well above 400k for the third week in a row now. This data series is becoming more and more of a concern. Personal Income and Spending were up a robust 0.6 and 0.5% respectively, however if one looks at the inflation adjusted figures, they were essentially flat. In Canada, GDP actually declined 0.2% in February. This week’s economic schedule will include the ISM Surveys as well as the monthly employment report.
INFLUENCES: Our trader sentiment surveys moved up half a point last week. On a scale of 0-10, the survey average rose to 4.5, which is neutral. The Commitment of Traders report showed that Commercial traders were net long 226k 10 year Treasury Note futures equivalents – which is a decrease of 156k from 2 weeks ago. This metric is now neutral as well. Seasonal influences are turning positive in May. The technical picture remains barely range bound, as the bond futures look set to break through the top end of the recent narrow trading range between 118 and 122. We are slightly long here with tight stops as we anticipate a confirmation of an upside break out next week.
RATES: The US Long Bond future traded up 1½ points to 122-12, while the yield on the US 10-year note fell 11 bps to 3.29% last week. The Canadian 10 year yield decreased 9 basis points to 3.20%. The Canada-US 10 year spread moved in the US market’s favour. The US 10 year yield is trading 9 bps higher than the Canadian 10 Year yield. The US yield curve was slightly flatter, with the difference between the 2 year and 10 year Treasury yield in 5 bps to 269.
BOTTOM LINE: Bond yields were lower last week, while the yield curve tilted slightly flatter. The fundamental backdrop looks increasingly supportive. Trader sentiment is neutral and so is the Commitment of Traders data, while seasonal influences are turning positive now. I am leaning positive on the bond market as I look for some confirmation that we are breaking through the 122 top of the recent trading range for the bond futures.
Levente Mady 604 646 2088 Lmady @ union-securites.com
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