WHO'S NOT SELLING BONDS?
First, the US Treasury has hundreds of billions of dollars of bonds to sell to fund the trillion dollar deficits Congress is mandating.
Second, the Federal Reserve will be selling the trillions of dollars of securities they have purchased in the recent expansion of the monetary base.
Third, and finally, any investor who owns bonds will be selling to avoid the coming bear market.
Paterson is advising its clients to continue to extend the maturity of liabilities past the 5 year mark, and look at 10 year liabilities, or more.
TACTICS
Continue to shorten the maturity of assets and use money market arbitrage to improve earnings.
Consider borrowing long term deposits.
Use extreme caution on long term lending.
STRATEGY
Warn senior management and the board that a disaster is in the offing.
The flood of money recently added by the Fed will either cause inflation or increases in long term interest rates - or both.
Showing posts with label spreads. Show all posts
Showing posts with label spreads. Show all posts
Monday, May 04, 2009
Friday, January 23, 2009
Credit Spreads at 800 Basis Points
The spread between Baa credits and 10 year US Treasuries reached 800 basis points.
The cost of long-term corporate debt has declined more than 100 BPs, but is still at historic spreads to Treasuries.
MONEY CONTINUES TO GROW
The Fed's policy of adding reserves to the system continued in the past two weeks, and the monetary base is now twice it's value in September of 2008.
Here is the raw data.
Paterson is confident that the Fed's action to support the fixed income markets with massive purchases of securities will shorten the recession by many years.
REAL ESTATE LENDING RESUMES
Even as the economy continues to deteriorate from the collapse in wealth in the stock and property markets, the business of lending is stabilizing.
In California the number of homes sold last month increased nearly 200%.
As this trend continues, the housing market will stabilize.
However, do not expect the trend of the last 20 years to resume. Growth in the value of real estate was caused by the decline in interest rates due to the elimination of inflation. That game is over.
SUMMARY
The Fed's actions to stabilize money growth are succeeding, suggesting a resumption of economic growth in months, not years.
Residential real estate lending - at prudent underwriting standards - is safe again. It is unlikely we will see much more of a sell-off in residential real estate.
Commercial real estate is in much worse shape and should be avoided except for unique situations. The economy has much farther to go to see a bottom.
New lows in stocks. As the magnitude of the disaster grows, there is a significant probability we will see new lows in the stock markets. If this happens, it will probably present a buying opportunity. Look for record volume in shares traded as the signal we've seen the bottom.
However, do not expect a quick rebound. Paterson expects a double or triple bottom in stocks before all selling is done.
TACTICS
Continue money market arbitrage. Paterson is advising clients to take advantage of the double digit yields in high quality short term paper. These assets can be funded profitably with deposits and the book matched nearly to the day.
Do not run a mis-matched book.
Avoid commercial real estate.
Expand prudent residential real estate lending and sell all long-term assets in the secondary market.
Balance sheet lending is extremely risky.
STRATEGY
Make senior management and the Board aware of the successes of the risk management team. Suggest bonuses for continued excellent performance.
Cooperate with regulators to understand their concerns and allay their fears.
The cost of long-term corporate debt has declined more than 100 BPs, but is still at historic spreads to Treasuries.
MONEY CONTINUES TO GROW
The Fed's policy of adding reserves to the system continued in the past two weeks, and the monetary base is now twice it's value in September of 2008.
Here is the raw data.
2008-09-10 874.703
2008-09-24 939.395
2008-10-08 1014.655
2008-10-22 1174.106
2008-11-05 1265.015
2008-11-19 1506.539
2008-12-03 1502.872
2008-12-17 1689.661
2008-12-31 1728.184
2009-01-14 1773.924
Paterson is confident that the Fed's action to support the fixed income markets with massive purchases of securities will shorten the recession by many years.
REAL ESTATE LENDING RESUMES
Even as the economy continues to deteriorate from the collapse in wealth in the stock and property markets, the business of lending is stabilizing.
In California the number of homes sold last month increased nearly 200%.
As this trend continues, the housing market will stabilize.
However, do not expect the trend of the last 20 years to resume. Growth in the value of real estate was caused by the decline in interest rates due to the elimination of inflation. That game is over.
SUMMARY
The Fed's actions to stabilize money growth are succeeding, suggesting a resumption of economic growth in months, not years.
Residential real estate lending - at prudent underwriting standards - is safe again. It is unlikely we will see much more of a sell-off in residential real estate.
Commercial real estate is in much worse shape and should be avoided except for unique situations. The economy has much farther to go to see a bottom.
New lows in stocks. As the magnitude of the disaster grows, there is a significant probability we will see new lows in the stock markets. If this happens, it will probably present a buying opportunity. Look for record volume in shares traded as the signal we've seen the bottom.
However, do not expect a quick rebound. Paterson expects a double or triple bottom in stocks before all selling is done.
TACTICS
Continue money market arbitrage. Paterson is advising clients to take advantage of the double digit yields in high quality short term paper. These assets can be funded profitably with deposits and the book matched nearly to the day.
Do not run a mis-matched book.
Avoid commercial real estate.
Expand prudent residential real estate lending and sell all long-term assets in the secondary market.
Balance sheet lending is extremely risky.
STRATEGY
Make senior management and the Board aware of the successes of the risk management team. Suggest bonuses for continued excellent performance.
Cooperate with regulators to understand their concerns and allay their fears.
Sunday, November 16, 2008
Apology
For the past three months Paterson has been busy working with existing and new clients to avoid the disaster in the credit markets.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
My apologies to students, casual readers, and potential clients for the absence of this weblog.
Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.
Saturday, August 09, 2008
Markets at Major Turning Points
Gold at Major Support
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.
Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.
Treasury Note Futures
Treasury Bond Futures
Note that ond prices surged following a successful auction.
Corporate Bond Spreads Falling
Stocks finding Support
NYSE Composite
S&P 500
Russell 2000
SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.
Remember, stock prices rise when interest rates come down and stay down.
Friday, June 27, 2008
Inflation and the Bond Market
Bonds sank through support this month and are now back at May's support levels, now resistance for this instrument.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
The question now is how low will prices go, and how high will long rates rise?
To answer this question we look at the money supply and the dollar. The first causes inflaton, and the second makes inflation worse.
MONEY SUPPLY
The monetary base is growing, but growth has been slowing for years.
This is a good sign for inflation, showing the Fed's commitment to control the supply of high-powered money.
In recent months, however, growth has accelerated slightly, but not enough to cause inflation.
Bank generated money has grown substantially in the past years, as businesses work their way through the recent Fed-caused disaster.
In recent months, growth in this leading indicator has slowed, leading to renewed confidence in the Fed's management of interest rates and the money supply.
In summary, inflationary pressures are not building, and there is no need to raise interest rates.
INFLATION AND THE DOLLAR
Price rises in the United States are connected to the falling dollar. Import prices are soaring as international demand for primary commodities pulls at suppliers.
The rise in commodity prices is directly related to the fall in the value of the dollar.
Notice the plunge in the dollar in 2006, and the simultaneous rise in PPI.
TACTICS
Prudent A/L managers will continue to lengthen liability maturities, shorten asset maturities, and work for higher spreads in lending.
Money market arbitrage is more profitable than ever, and those clients pursuing this activity have found their yields soaring dramatically.
The key to this business is a careful analysis of credit quality. High quality credits have been pushed off the curve hundreds of basis points, providing opportunities for lenders with excess cash.
STRATEGY
Now is the time to report to senior management and the Board on the A/L condition of the portfolio.
The institution is liquid, carrying good credits, good spreads, and profitable liabilities. In short, we are ready to lend to our existing customers, and prepared to take business from our weaker competitors.
The Asset/Liability department can take a bow.
Friday, December 07, 2007
Spreads Widen in Flight to Quality
In the past month, the debt and equity markets fluctuated widely in the face of economic and financial uncertainty.
Most surprising is the rally in US Treasuries following November's quarterly refunding.
As the chart shows, bond futures rallied from 114 to 119 before retracing to the 116 level today.
At the same time, spreads between Treasuries and BAA Corporates have widened more than 60 basis points.
EQUITY MARKET REACTION
The NYSE composite at first fell dramatically, signaling either a rise in long term interest rates of a decline in earnings.
As did the bond market, the equity market is retracing its steps.
MONEY SUPPLY
While all this is happening, the money supply growth accelerated exclusively from bank lending.
As the chart below shows, the Monetary Base has grown at a relatively mild 3% while MZM is growing faster every month.
INFLATION IS COMING
Money growth in excess of GDP growth causes inflation.
In its attempt to mitigate the damage from the Fed-caused rise in short term rates, the Fed has chosen to reflate the economy and allow banks to pour money into the system. This will cause inflation to rise in 6-18 months.
The Fed will then have to start raising rates again, and will probably push the economy into a recession in order to get money under control again.
SUMMARY
Until then, credit and equity markets will remain confused.
TACTICS
Money market arbitrage will continue to generate solid earnings.
Continue to reduce exposure to long term assets.
Re-evaluate asset pricing spreads to ensure an adequate return on risky lending.
Consider lengthening liability maturities further.
STRATEGY
Emphasize to senior management and the Board the dangers of money growth on inflation and interest rates.
Prepare them for action to lengthen liability maturities.
Discuss trading and hedging policies and procedures in preparation for future increases in long term interest rates.
Most surprising is the rally in US Treasuries following November's quarterly refunding.
As the chart shows, bond futures rallied from 114 to 119 before retracing to the 116 level today.
At the same time, spreads between Treasuries and BAA Corporates have widened more than 60 basis points.
EQUITY MARKET REACTION
The NYSE composite at first fell dramatically, signaling either a rise in long term interest rates of a decline in earnings.
As did the bond market, the equity market is retracing its steps.
MONEY SUPPLY
While all this is happening, the money supply growth accelerated exclusively from bank lending.
As the chart below shows, the Monetary Base has grown at a relatively mild 3% while MZM is growing faster every month.
INFLATION IS COMING
Money growth in excess of GDP growth causes inflation.
In its attempt to mitigate the damage from the Fed-caused rise in short term rates, the Fed has chosen to reflate the economy and allow banks to pour money into the system. This will cause inflation to rise in 6-18 months.
The Fed will then have to start raising rates again, and will probably push the economy into a recession in order to get money under control again.
SUMMARY
Until then, credit and equity markets will remain confused.
TACTICS
Money market arbitrage will continue to generate solid earnings.
Continue to reduce exposure to long term assets.
Re-evaluate asset pricing spreads to ensure an adequate return on risky lending.
Consider lengthening liability maturities further.
STRATEGY
Emphasize to senior management and the Board the dangers of money growth on inflation and interest rates.
Prepare them for action to lengthen liability maturities.
Discuss trading and hedging policies and procedures in preparation for future increases in long term interest rates.
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