CBOT August Volume Reaches Second Highest Monthly Total in Exchange History
The CBOT announced today that average daily volume (ADV) reached 3,341,170 contracts in August, an increase of 23 percent compared with August 2005.
Total volume for the month reaches second highest monthly total in CBOT history.
Wednesday, September 06, 2006
Monday, September 04, 2006
Volume Spike in Bonds
Both volume and open interest in the CBOT futures contract have spiked at this crucial juncture.
As the market moves away from this point, winners' hands get stronger, while losers' hands get weaker, reinforcing the movement in prices.
TACTICS
Sell bonds here.
Be ready to buy 'em back if they break out.
Be ready to go long if prices break out on the upside.
STRATEGY
Look out!
Warn the boss and the board.
This will mean a major inversion of the yield curve.
Next Fed move is down!
Saturday, August 26, 2006
Bond Market at Major Resistance
BONDS RALLY AFTER US TREASURY REFUNDING
In the weeks since the US Treasury sold 3, 10, and 30 year debt securities the bond market has rallied each week.
Here's the weekly data. Looks like a double bottom.
Bear markets don't behave like this. Something is going on.
Let's go to the charts.
GOLD - Daily prices till August 25th
Gold prices have broken. Unless money starts growing again, there is no upside for gold.
As we said back in July, when gold stops going up, so will Fed Funds.
Prudence will require the Fed to keep short rates at these levels for 6 months.
If the Fed knows it's business, it will widen the band for targeting Fed Funds and allow the market to allocate short term rates.
In addition, widening the band will also reduce the volatility of the Money supply.
MONEY SUPPLY - BASE, MZM, M1, M2
We present the data since the end of the last recession.
Monetary Base is growing nicely.
MZM has consistently declined and is still doing so, but still positive.
M1 Moves Into Negative Territory
After flirting with negative growth earlier in the year, M1 has moved into the red this past month.
As long as money doesn't grow, neither will inflation, or gold.
M2 Growing Nicely
M2 is growing at the 4% level
SUMMARY
Gold prices have broken decisively, bonds are making a base, money is under control.
TACTICS
Continue money market arbitrage and carefully add long-term assets as long as a profitable spread can be maintained.
STRATEGY
Hint - but only hint - that the bear market in bonds might be over.
Fed action to control bank lending has succeeded and money is not growing.
Short-term rates will stay high for another 6 months.
The bands on Fed Funds might widen and there will be more volatility in short term rates.
Strengthen the Treasury department and add a board member who's familiar with A/L management.
In the weeks since the US Treasury sold 3, 10, and 30 year debt securities the bond market has rallied each week.
Here's the weekly data. Looks like a double bottom.
Bear markets don't behave like this. Something is going on.
Let's go to the charts.
GOLD - Daily prices till August 25th
Gold prices have broken. Unless money starts growing again, there is no upside for gold.
As we said back in July, when gold stops going up, so will Fed Funds.
Prudence will require the Fed to keep short rates at these levels for 6 months.
If the Fed knows it's business, it will widen the band for targeting Fed Funds and allow the market to allocate short term rates.
In addition, widening the band will also reduce the volatility of the Money supply.
MONEY SUPPLY - BASE, MZM, M1, M2
We present the data since the end of the last recession.
Monetary Base is growing nicely.
MZM has consistently declined and is still doing so, but still positive.
M1 Moves Into Negative Territory
After flirting with negative growth earlier in the year, M1 has moved into the red this past month.
As long as money doesn't grow, neither will inflation, or gold.
M2 Growing Nicely
M2 is growing at the 4% level
SUMMARY
Gold prices have broken decisively, bonds are making a base, money is under control.
TACTICS
Continue money market arbitrage and carefully add long-term assets as long as a profitable spread can be maintained.
STRATEGY
Hint - but only hint - that the bear market in bonds might be over.
Fed action to control bank lending has succeeded and money is not growing.
Short-term rates will stay high for another 6 months.
The bands on Fed Funds might widen and there will be more volatility in short term rates.
Strengthen the Treasury department and add a board member who's familiar with A/L management.
Monday, August 14, 2006
Day of Reckoning is Here
As we suggested last week, traders are selling into the recent rally.
Prices are down a point and a half in the long-bond futures contract from the highs of last week.
In the days and weeks to come, the forces of inflation will battle those of higher short-term interest rates and in the end, Asset/Liability Mangers will have a clearer sense of direction for interest rates.
CURRENT MARKET SITUATION
As the chart above shows, bond prices have run up to the lows of last March, where this bear market began, and have fallen back.
TACTICS
Money Market arbitrage is the best policy for the next year or so.
Contact Paterson for more information.
STRATEGY
Continue to shrink the A/L portfolio, reducing long-term assets and liabilities, and adding to Fed Funds.
Prices are down a point and a half in the long-bond futures contract from the highs of last week.
In the days and weeks to come, the forces of inflation will battle those of higher short-term interest rates and in the end, Asset/Liability Mangers will have a clearer sense of direction for interest rates.
CURRENT MARKET SITUATION
As the chart above shows, bond prices have run up to the lows of last March, where this bear market began, and have fallen back.
TACTICS
Money Market arbitrage is the best policy for the next year or so.
Contact Paterson for more information.
STRATEGY
Continue to shrink the A/L portfolio, reducing long-term assets and liabilities, and adding to Fed Funds.
Monday, August 07, 2006
SHORTEST BEAR MARKET IN HISTORY?
As the Treasury auctions 3, 10, and 30 year securities, the bond market has rallied sharply, returning to the levels of March 2006 when this bear market began.
Experienced traders will be selling into this rally, expecting prices to fall as new supply enters the market.
Gold prices have broken.
Money is under control.
TACTICS
Sell into this rally, but be prepared in the weeks to come to change your opinion of this market.
STRATEGY
Continue to put new money into shor-term instruments and expand the Money Market Arbitrage operation.
Experienced traders will be selling into this rally, expecting prices to fall as new supply enters the market.
Gold prices have broken.
Money is under control.
TACTICS
Sell into this rally, but be prepared in the weeks to come to change your opinion of this market.
STRATEGY
Continue to put new money into shor-term instruments and expand the Money Market Arbitrage operation.
Sunday, July 30, 2006
Treasury Refinancing in August
On August 2, 2006 the US Treasury will announce the size of the auction for 3, 10, and 30 year securities.
This event will give the markets a good idea about the demand for long-term debt.
In the current situation, it's most likely prices will fall prior to the auctions, and rise afterward, as Wall Street sells these securities to the public. This is the standard scenario in a bear market.
The size of the fall in prices will tell us what kind of orders the Primary Dealers have for this issue. Small decline means many orders.
However, if after the auction prices fall, it will signal the next stage in the bear market, begun in March of 2006, and an unwillingness by pension funds, insurance companies, and mutual funds to take on these securities in this bearish environment.
WARNING!
Recent analysis of money data for the past four years reveals a puzzle.
Money is not growing at the rate one would expect in a bear market. Neither the monetary base, MZM, M1, nor M2 are growing fast enough to generate inflation.
Something else is going on here, and it pays to be prudent.
TACTICS
Do not extend liability maturities past two years.
STRATEGY
Keep the book matched, and keep adding to overnight funds for the near future.
Fed Funds will continue to stay high for the next year - at least - to control inflationary expectations.
Keep an eye on gold prices. They will tell A/L managers if the Fed will continue to raise rates.
This event will give the markets a good idea about the demand for long-term debt.
In the current situation, it's most likely prices will fall prior to the auctions, and rise afterward, as Wall Street sells these securities to the public. This is the standard scenario in a bear market.
The size of the fall in prices will tell us what kind of orders the Primary Dealers have for this issue. Small decline means many orders.
However, if after the auction prices fall, it will signal the next stage in the bear market, begun in March of 2006, and an unwillingness by pension funds, insurance companies, and mutual funds to take on these securities in this bearish environment.
WARNING!
Recent analysis of money data for the past four years reveals a puzzle.
Money is not growing at the rate one would expect in a bear market. Neither the monetary base, MZM, M1, nor M2 are growing fast enough to generate inflation.
Something else is going on here, and it pays to be prudent.
TACTICS
Do not extend liability maturities past two years.
STRATEGY
Keep the book matched, and keep adding to overnight funds for the near future.
Fed Funds will continue to stay high for the next year - at least - to control inflationary expectations.
Keep an eye on gold prices. They will tell A/L managers if the Fed will continue to raise rates.
Monday, July 17, 2006
GOLD IS STILL THE STORY
As long as gold keeps going up, so will Fed Funds.
Long-term rates
Bond prices are not falling.
The bond market is a puzzle. Either gold is right, and inflation is coming, or the bonds are right, and inflation's under control.
Money Supply
Money usually tells the tale, but in this case, the data is confusing.
While most current money numbers are under control, past money growth has built a powerful backlog of fuel for price increases.
Money velocity increases as short rates rise, due to the increased benefit of leaving cash in an interest-bearing account, and this can temporarily increase demand.
Work the short end of the curve
Money market arbitrage is the tactic of choice at this time.
Call or email Paterson Financial for advice on making profits at the short end of the yield curve.
Long-term rates
Bond prices are not falling.
The bond market is a puzzle. Either gold is right, and inflation is coming, or the bonds are right, and inflation's under control.
Money Supply
Money usually tells the tale, but in this case, the data is confusing.
While most current money numbers are under control, past money growth has built a powerful backlog of fuel for price increases.
Money velocity increases as short rates rise, due to the increased benefit of leaving cash in an interest-bearing account, and this can temporarily increase demand.
Work the short end of the curve
Money market arbitrage is the tactic of choice at this time.
Call or email Paterson Financial for advice on making profits at the short end of the yield curve.
Monday, July 10, 2006
Fed's in a Box
GOLD PRICES LEAD THE WAY AGAIN
In the past week gold prices have risen from $575 to $625 and look like they will head higher in the coming months.
If so, the Fed is now in a box and cannot escape raising rates again, and perhaps for several more times.
From the outset of Fed action, back in 2004 the gold market has led the way in forecasting future Fed action. As gold rises, so must the target rate for Fed Funds.
Once the gold market broke, back in May of 2006, it appeared the Fed had done its job and could stop raising rates. As the perception of this intent soaked into market thinking, the bond market stabilized, the stock market corrected, and a sigh of relief escaped from bullish traders.
That thinking is now in jeapordy, and the gold market is telling A/L managers to be very careful.
If the gold market is right, and inflation is still a powerful force, then the Fed is not done tightening, and short term rates are certainly headed higher.
TACTICS
At times like this the A/L department, and its senior managers play an important role in the profitability of the institution.
1. Be aware of all market action. Start with money numbers, then keep an eye on gold, bonds, stocks and other commodities. Watch inflation and output numbers. Don't leave your desk even to get a glass of water.
2. Communicate to senior management. Give the CEO the information necessary to implement the A/L management plan.
3. Review new business to see that sufficient spreads are being built into every deal. Highlight any new business that is not profitable right away.
4. As old loans roll off, make sure the assets are invested in Fed Funds or a equally short-term instruments. Both safety and yield are enhanced by shortening asset maturities. Remember, Fed Funds is the highest spot on the yield curve. Take advantage of that fact and take credit for making profits. Consider using a Funds broker like Tullet Prebon. Ask for Mark Edelsberg.
5. Review hedging programs and obtain conditional authority from senior management for quick action.
6. Encourage Board participation where needed. Sometimes, the board wants to know what the A/L department is doing, and if they do, make sure to tell them. The A/L department makes decisions that affect the entire institution, and the Board must know about them, and approve. People lose their jobs over these kinds of mistakes.
STRATEGY
Be foresighted. Look out several quarters and see what kinds of business is rolling off, what kinds of business is being done, and where the institution is heading.
Consider alternative revenue streams. As spread lending comes under fire from rising Fed Funds, consider fee based activities. Recommend this course of action to senior management.
Most important, ring the warning bell. Even if this is the bottom in bond prices, the top in gold, and the beginning of a massive bull market in stocks; even if your institution is heading for spectacular profits; and even if your A/L book is in great shape, there is still great uncertainty out there. Be careful. Be prudent. Be clear to senior management. The trouble is not over, yet.
Monday, June 26, 2006
Disaster in the Making?
BREAKING NEWS
US Treasury Notes and Bonds broke recent support last week and are hovering below new resistance levels, waiting for bad news to propel them toward new lows.
It would be very surprising if bonds can rally from here.
If bonds start to go lower, it will be a major sell-off, confirming the trend begun back in Janury of 2006 and confirmed in early March when notes broke major support.
Paterson's analysis suggests the 10 Year US Treasury note could lose 5 full points in the coming months, increasing yields 70 basis points or more to US note yields in excess of 6%.
Changes of this magnitude will provide an opportunity to add high yielding assets only if the liabilty structure is in place to support it.
The job of the Asset/Liability department is to forsee this kind of action at this stage in the interest rate cycle and prepare the institution for the event.
ANALYSIS
Asset/Liability managers must warn senior management of potentially rising long term rates, and prepare them for an extensive program of lengthening liability maturities, shortening asset maturities, and pricing new assets conservatively, There also must be plenty of juice in every deal. Do not underprice deals!
Also, those institutions with the ability to trade futures, options, and swaps should prepare emergency hedging operations.
As we said last week, the money numbers look good, as do gold prices, so it seems this is a real demand for long term liabilities pushing up long rates, not just an inflation play.
Institutions will see increased demand for long-term loans as borrowers switch out of adjustable loans.
PATERSON's HEDGING AND TRADING SEMINARS
- Hands-on personal training for A/L managers and their teams
- Training for senior management
- Board of Directors presentations
PATERSON'S 2Q 2006 CHARTBOOK
Paterson's latest Chartbook will take a detailed look at the fundamentals of this quarter and analyze the situation in the debt markets.
Look for the Chartbook in the second week of July.
See www.paterson.com for details.
Jim Klein
Monday morning, waiting for the show to begin.
US Treasury Notes and Bonds broke recent support last week and are hovering below new resistance levels, waiting for bad news to propel them toward new lows.
It would be very surprising if bonds can rally from here.
If bonds start to go lower, it will be a major sell-off, confirming the trend begun back in Janury of 2006 and confirmed in early March when notes broke major support.
Paterson's analysis suggests the 10 Year US Treasury note could lose 5 full points in the coming months, increasing yields 70 basis points or more to US note yields in excess of 6%.
Changes of this magnitude will provide an opportunity to add high yielding assets only if the liabilty structure is in place to support it.
The job of the Asset/Liability department is to forsee this kind of action at this stage in the interest rate cycle and prepare the institution for the event.
ANALYSIS
Asset/Liability managers must warn senior management of potentially rising long term rates, and prepare them for an extensive program of lengthening liability maturities, shortening asset maturities, and pricing new assets conservatively, There also must be plenty of juice in every deal. Do not underprice deals!
Also, those institutions with the ability to trade futures, options, and swaps should prepare emergency hedging operations.
As we said last week, the money numbers look good, as do gold prices, so it seems this is a real demand for long term liabilities pushing up long rates, not just an inflation play.
Institutions will see increased demand for long-term loans as borrowers switch out of adjustable loans.
PATERSON's HEDGING AND TRADING SEMINARS
- Hands-on personal training for A/L managers and their teams
- Training for senior management
- Board of Directors presentations
PATERSON'S 2Q 2006 CHARTBOOK
Paterson's latest Chartbook will take a detailed look at the fundamentals of this quarter and analyze the situation in the debt markets.
Look for the Chartbook in the second week of July.
See www.paterson.com for details.
Jim Klein
Monday morning, waiting for the show to begin.
Saturday, June 17, 2006
Is this this bottom?
Is this the bottom, or just the first leg down?
FIRST, the money numbers are favorable. None of the Ms - M1, M2, of MZM - show any signs of growth above 10% per year. Money is behaving itself after a disatrous decade under Greenspan.
SECOND gold prices have collapsed in the past five weeks from a high above $700 to today's prices below $600.
THIRD Interest rates have started making a bottom in the past five weeks.
FOURTH the stock market has taken a slamming, similar to the one Greenspan caused back in 1987, and it might not be over in stocks.
SUMMARY, managers must be cautious here, cleaning up their books and preparing for the next move.
LOOKING AHEAD
* Short term rates will continue to stay high for the next 6 months
* Long rates will stay below short rates
* Spreads between Treasuries and other instruments will widen
* Keep an eye on gold and money supply
TACTICS
* Lock in profitable long-term fixed spreads
* Hold back on lengthening long-term liabilities
* Let the portfolio contract
STRATEGY
* If gold takes off again, be prepared to lock in long term liabilities.
* If the Fed eases, pay close attention to gold
FIRST, the money numbers are favorable. None of the Ms - M1, M2, of MZM - show any signs of growth above 10% per year. Money is behaving itself after a disatrous decade under Greenspan.
SECOND gold prices have collapsed in the past five weeks from a high above $700 to today's prices below $600.
THIRD Interest rates have started making a bottom in the past five weeks.
FOURTH the stock market has taken a slamming, similar to the one Greenspan caused back in 1987, and it might not be over in stocks.
SUMMARY, managers must be cautious here, cleaning up their books and preparing for the next move.
LOOKING AHEAD
* Short term rates will continue to stay high for the next 6 months
* Long rates will stay below short rates
* Spreads between Treasuries and other instruments will widen
* Keep an eye on gold and money supply
TACTICS
* Lock in profitable long-term fixed spreads
* Hold back on lengthening long-term liabilities
* Let the portfolio contract
STRATEGY
* If gold takes off again, be prepared to lock in long term liabilities.
* If the Fed eases, pay close attention to gold
Sunday, May 21, 2006
Time to sell bonds
The bond market has retreated steadily since major support was broken on March 3rd.
Prices have risen and rates have fallen slightly for the past few days as this CBOT chart shows.
This is not the end of the bear market. It is only a pause before rates start rising again.
All financial institutions should begin lengthening the maturity of their liabilities.
Encourage long-term deposits, borrow from Reserve institutions, and sell bonds.
As rates continue to fall, institutions should get aggressive in the cash market and prepare a futures, options, and swaps program. Educate the Board of Directors and obtain authority for the required actions.
Assets should be re-invested in Fed Funds or at worst, 90 day instruments. Short term assets will continue to rise in yield as the Fed continues to slow the growth of money
Asset pricing must continue to be aggressive, and spreads maintained, even in the face of declining new business, as liability costs will not be falling in the near future. Locking in a low-yielding asset right now is a mistake.
SENIOR MANAGEMENT
Senior management must address the asset/liability situation of the institution and provide the Board of Directors with a comprehensive plan for an extended bear market in bonds.
If the bear market continues, many institutions will fail, as they are unaccustomed to dealing with rising interest rates.
Recall, interest rates have been declining since 1986, and most managers are unfamiliar with the tools, techniques, and emotional requirements for dealing with inflation and rising rates.
See www.paterson.com for help managing your A/L situation.
Wednesday, May 03, 2006
Classic Bear Market Signals
The bond market fell sharply today after the US Treasury announced a $34 billion refunding package of debt securities.
This is a classic signal of a bear market.
In a bull market - or at least a stable one - markets sell off in anticipation of refundings, and bounce back as Primary Dealers stabilze their books.
This is a classic signal of a bear market.
In a bull market - or at least a stable one - markets sell off in anticipation of refundings, and bounce back as Primary Dealers stabilze their books.
Tuesday, May 02, 2006
Fed Blunders Again
In the tradition of incompetence established by his predecessor, Fed Chairman Bernanke mistakenly suggested the Board of Governors might be done raising short term rates.
When the news got to the markets, gold and stocks jumped, and bonds fell.
Now Bernanke says he was misunderstood.
Here's part of the quote:
WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke says that the media and the markets had misinterpreted his words last week as a signal that the Fed would stop after one more rate hike, according to CNBC anchor Maria Bartiromo on Monday.
Bartiromo said she asked Bernanke in a conversation during a formal dinner on Saturday night whether "the markets got it right last week in speculating the Fed is done raising interest rates" after his testimony to Congress.
She reported that Bernanke replied no, and that he went on to say that he and his colleagues at the Federal Open Market Committee were trying to "create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur at future meetings.
When the news got to the markets, gold and stocks jumped, and bonds fell.
Now Bernanke says he was misunderstood.
Here's part of the quote:
WASHINGTON (MarketWatch) -- Federal Reserve Chairman Ben Bernanke says that the media and the markets had misinterpreted his words last week as a signal that the Fed would stop after one more rate hike, according to CNBC anchor Maria Bartiromo on Monday.
Bartiromo said she asked Bernanke in a conversation during a formal dinner on Saturday night whether "the markets got it right last week in speculating the Fed is done raising interest rates" after his testimony to Congress.
She reported that Bernanke replied no, and that he went on to say that he and his colleagues at the Federal Open Market Committee were trying to "create some flexibility for the Federal Reserve, saying the Fed may pause but the data will really dictate whether more rate hikes will occur at future meetings.
Saturday, April 29, 2006
Market Analysis April 2006
BEAR MARKET IN BONDS CONFIRMATION
In one week market participants confirmed our analysis that we are in an inflation-driven bear market for bonds.
Bonds were setting new lows for the cycle,
Gold spurted ahead $18 on Friday alone, closing above $650.
NYSE composite closing over 800 for the first time.
Bernanke announces possible end of rate increases
In one week market participants confirmed our analysis that we are in an inflation-driven bear market for bonds.
Bonds were setting new lows for the cycle,
Gold spurted ahead $18 on Friday alone, closing above $650.
NYSE composite closing over 800 for the first time.
Bernanke announces possible end of rate increases
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