Tag Archives: bonds

What Are Yields Yelling

The bond market flashed warning signals on Friday and we look at what it could mean for FX. Last week, the pound was the top performer while the Canadian dollar lagged badly on  5 consecutive days of declines. The Asia-Pacific calendar is light to start the week.

USD/CAD continued to move higher in early-week trading, hitting 1.0910 from 1.0888 at the open. Otherwise, action has been light as the week gets under way.

Last week ended with US non-farm payrolls casting doubt on the strength of the US economy heading into 2014 and the report sparked some sizeable moves across assets, including a slump in the US dollar. The moves that really stood out were in the bond market as yields tumbled.

Five-year yields fell 13 basis points to 1.62% and 30s fell 8 bps to 3.80%, below the yield when the Fed announced a taper on Dec 16. The magnitude of the declines in yields should not be taken lightly, it’s either a squeeze on of over-ambitious shorts or it’s signaling a flight to quality that could spill over and lead to declines in stocks and USD/JPY.

The market is complacent in the view that economic growth will pick up toward 3% in 2014, businesses will begin to invest and inflation will track higher. That’s a reasonable line of thinking but it hasn’t been confirmed by data and significant risks remain.

Weekend news was mostly inconsequential but there was positive news from Iran where negotiators struck a nuclear deal that lifts restrictions on oil exports. The move could weigh on oil prices, especially Brent.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by – long by +.
EUR +14K vs +31K prior
JPY -129K vs -135K prior
GBP +18K vs +23K prior
AUD -57K vs -57K prior
CAD -61K vs -58K prior
CHF +5K vs +11K prior

The market has struggled to build any significant positions in euros because of the lack of consistent trend. The move toward neutral came after the break of the 55-dma but Friday’s rebound likely confused traders further.

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Cable near three-week low

Every day we spin the wheel. Pick one of the PIIGS and pick one of the four following problems: banks, bonds, politics, ratings.

One day it’s Greece and politics, the next it’s Italy and bonds. The news is never positive; just bad or good enough to spark a short squeeze.

I’m generally a trend-following trader and after two weeks of nasty, directionless gyrations, I’m frustrated.

But there may finally be some clarity. I’m closely watching cable right now. The October rebound cleared but failed to close above the 61.8% retracement of the September fall. Now, we are testing the low end of the range and a break may be imminent.

It’s doubtful that I will trade a potential break of 1.5868. Ideally we will get a close below that level and perhaps a weekly close below 1.5820. That would give be the confidence to sell GBP/USD.

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After the Greek Haircut it’s Time to Focus on the ECB

So much is going on in Europe. The number one thing I’m waiting on is the Greek bond haircut but something around 50% seems fairly certain at this point. The euro will rally once there is an agreement but it will be telling to see how much it rises.

Quick recap/analysis of today’s news:

–          EU agrees to 9% bank capital ratio. €106B to be raised, with 75% of it in Greece, Spain, Italy and Portugal. The list of how much banks in each country must raise is here.

There is no way Greek banks can raise €30 billion so that money is coming straight out of the EFSF. I don’t know all the details of European financials but I’m eager to see how they react in stock markets tomorrow. I’ll go from there.

There is also to be a question about whether convertible debt will count toward the ratio but I’m guessing Germany and Spain will lose.

Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital. (link)

–          No concrete news on the EFSF but it sounds like a two-pronged approach. 1) first loss guarantees on new periphery debt 2) Use the EFSF and get investors (China) build a fund that will buy debt on the secondary market.

For instance, Italy will need to issue about €300 billion next year. If the EFSF guarantees the first 20% of losses, that would amount to €60 billion. If Italian funding is still under strain, the second approach will be implemented.

At those rates, the EFSF will be swallowed up fairly quickly. The longer-term risk is that debt markets get addicted to the EFSF backstop and that it will never be removed. On the face of it, it’s an okay plan. The near-term risk is that the details fail to impress.

–          Italy delivered a letter of intent to reform spending and sell €15 billion of assets over the coming three years.

A fist-fight broke out in Italian parliament about pension reform after an opposition leader said coalition partner Bossi’s didn’t favour pension reform because his wife retired on a generous state pension at the age of 39 from her job as a teacher.

I would say stability in Italy is a major question mark right now and Burlesconi is a major liability. The whole thing could come crashing down because of these idiots.

As I mentioned, the Greek haircut news is really the last piece of the puzzle for the immediate term. The market will then immediately shift its focus to the ECB’s Nov. 3 meeting, just one week away.

Although this is the first meeting led by Draghi, I don’t see him hesitating to cut rates.

Regardless of the outcome, the market will make a strong push to price in a dovish scenario over the next three days. I’m not trading this news but I would like to sell a post-Greek-haircut bounce, especially if a spike over 1.40 looks like a short squeeze.

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