Treasury Auction Examined

On Wednesday and Thursday of last week the Treasury successfully auctioned 10 year and 30 year securities.

Following a sharp sell off several weeks ago, the 10 year notes rallied after their auction and the 30 year bonds held steady.

For now, supply is not a problem.

Major breaks in bond prices are related to economic growth.

Money Numbers Examined

The latest money numbers continue to show a massive increase in the monetary base.

In percentage terms, only M1 is growing.

M2 and MZM show little or no growth in the past year.

Until banks start making loans, the Federal Reserve will have little incentive to raise short-term interest rates.

10s today, 30s tomorrow, and we're at major support

This is the week that helps predict the future for long-term interest rates.

The auction by the US Treasury of 10-year notes today, and 30-year bonds tomorrow provides the first data point in the new Fed-less bond market regime.

At the close of business yesterday, April 6, their respective yields were 3.98 and 4.84.

We will certainly revisit this data often in the months and years to come. Make a note.

The bond futures contract closed yesterday at 114.11. Make another note.

As the US Treasury sells more and more debt to refinance existing debt, and create new obligations to fund the expansion of government programs, rates are certain to rise.

Combined with the Treasury's added supply, the US Federal Reserve will be selling both mortgage-backed securities and treasuries to reduce the amount of inflationary fuel in the banking system before the banks can use it to make loans to credit-worthy borrowers.

As banks make loans, and the economic expansion takes hold, inflation grows. Further pressure on bond holders will come from the deteriorating value of the currency. Inflation kills bonds.

The combined pressure from these three sources will be too great for bond yields to hold, and they will certainly continue the rise that began more than a year ago, when 30-year bond yields bottomed at 2.58 in late December of 2008.

Our trader is shorting bonds at every resistance level, and will soon be aggressively selling when support breaks - like today and tomorrow.

Paterson's analysis suggests that the bond contract has a long way to fall, and will probably break par, with yields above 6%.

Get short and get rich.

* * * * * J B K * * * * *

San Francisco

James B. Klein
Paterson Financial Services

WEBSITE: paterson.com
WEBLOG: paterson-financial-services.blogspot.com
NEWS WEBLOG: paterson-financial-services-news.blogspot.com

Fed says extended period may last a long time | Reuters

Bank lending is too weak to allow the Fed to push up the funds rate.

Until bank lending increases, the Fed seems happy to leave things as they are, and to focus on the long end of the curve.

Instead of bank lending, we see banks securitizing their loans and keeping their balance sheets flush with cash.

* * * * * J B K * * * * *

San Francisco

The Federal Reserve could keep interest rates ultra-low for even longer than investors expect if the economic outlook worsens or inflation drops, minutes from the central bank's last meeting suggested.

The minutes of the Fed's March 16 gathering, released on Tuesday showed lingering concern about the economy's prospects, with policymakers indicating they were in no hurry to raise interest rates.

"The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further," the minutes said.

"Such forward guidance would not limit the committee's ability to commence monetary policy tightening promptly," they said.

http://www.reuters.com/article/idUSTRE6354CM20100406

‘Unloved’ Junk Debt May Be Best Bond Investment: Credit Markets - Bloomberg.com

Reaching for yield and taking risk.

It's that time in the business cycle.

GS already has theirs, and they now want to sell it to you.

It's a good trade.

* * * * * J B K * * * * *

San Francisco

April 6 (Bloomberg) -- Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally.

Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor's scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a7P22sf_Lf4Q&pos=3

How Texas Escaped the Housing Crisis - ABC News

I'll be damned.

It's written in the state constitution: no cash-out refis.

I'd prefer to change Fannie and Freddie's underwriting guidelines.

* * * * * J B K * * * * *

San Francisco

But there is a broader secret to Texas's success, and Washington reformers ought to be paying very close attention. If there's one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it's to follow the Lone Star State's lead and put the brakes on "cash-out" refinancing and home-equity lending.

http://abcnews.go.com/Business/TheBigMoney/texas-escaped-housing-crisis/story?id=10243782

Construction Spending in the U.S. Decreases to Seven-Year Low - Bloomberg.com

It will be a long time before commercial real estate recovers.

The world has changed, and the use of commercial space is changing.

Stay away.

Residential will do just fine.

Everybody needs a home, whether they rent or buy.

Maybe it's time to buy an S&L - again.

* * * * * J B K * * * * *

San Francisco

April 1 (Bloomberg) -- Construction spending in the U.S. fell in February to the lowest level in more than seven years, signaling this part of the economy remains in a recession.

The 1.3 percent decrease to $846.2 billion, the lowest since November 2002, followed a revised 1.4 percent drop in January that was more than twice as large as previously estimated, Commerce Department figures showed today in Washington.

Housing will be slow to rebound as foreclosures climb and Americans are uncertain about job prospects. At the same time, commercial and government building are also slumping, restrained by a lack of credit and swelling budget deficits.

http://www.bloomberg.com/apps/news?pid=20601068&sid=aK4orcqqi590

Payrolls in U.S. Rose 162,000 in March; Unemployment at 9.7% - Bloomberg.com

Wow.

It's not a big number, but it's earlier than even we thought.

Non-farm payrolls started increasing in QI 2010. Make a note.

The bonds are taking this hard, and are breaking minor support.

* * * * * J B K * * * * *

San Francisco

April 2 (Bloomberg) -- Employment in the U.S. increased in March by the most in three years and the unemployment rate held at 9.7 percent as companies gained confidence the economic recovery will be sustained.

Payrolls rose by 162,000 last month, less than anticipated, figures from the Labor Department in Washington showed today. The March increase included 48,000 temporary workers hired by the government to conduct the 2010 census, as well as job gains in manufacturing and health services.

The government revised January and February payroll figures up by a combined 62,000, putting the March gain at 224,000 after including the updated data. Caterpillar Inc. is among companies adding staff, indicating the recovery that began in the second half of 2009 is starting to foster the jobs needed to lift consumer spending and sustain the expansion.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aehAkiag49Hc

Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue - Bloomberg.com

You'll want to read all of this article.

It shows the types of assets in the Fed's portfolio, and for which they paid hard cash.

Interestingly, they own some CDSs that made them some money.

* * * * * J B K * * * * *

San Francisco

April 1 (Bloomberg) -- After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout.

In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns's takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZA_RWY3IJ2I&pos=3

Europe Inflation Jumps More Than Economists Forecast (Update2) - Bloomberg.com

And this is from a currency that did not increase the monetary base.

How can the US avoid inflation?

* * * * * J B K * * * * *

San Francisco

European inflation accelerated more than economists forecast on higher oil prices, while the unemployment rate reached double-digits for the first time since 1998.

Consumer prices in the 16-nation euro region increased 1.5 percent in March from a year earlier, after a 0.9 percent gain in February, the European Union statistics office in Luxembourg said today. That is the fastest inflation since December 2008 and topped the median forecast of 1.1 percent in a Bloomberg survey of 36 economists. Unemployment rose to 10 percent in February, the highest rate since August 1998, a separate report showed.

http://www.bloomberg.com/apps/news?pid=20601068&sid=arrsXM4KpmGs

Reform in Congress Lacking Cash Clause to Stop Lehman-Like Runs - Bloomberg.com

The problem is not liquidity, but rather government incompetence and corruption.

These problems would not exist if the Congress had not lowered Fannie and Freddie's standards.

There's where the reform must begin.

* * * * * J B K * * * * *

San Francisco

March 29 (Bloomberg) -- In 2,615 pages of financial reform legislation introduced in the U.S. Congress, there are no rules to ensure that banks keep enough cash-like assets when credit disappears.

Guidelines on liquidity risk management, which were published March 17 by the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp., also avoided spelling out how much banks need to hold, and in what form, to make sure they don't collapse if short-term lending dries up. International efforts to do that for the global banking system could take years to implement.

Citigroup Inc., which came close to a funding shortfall in 2008 and received a $45 billion government infusion, is among U.S. lenders that have hoarded cash since credit markets seized up two years ago. Even so, the banks continue to rely on overnight borrowing for their funding needs. While down from its peak in 2007, the U.S. repo market, which provides banks with short-term lending backed by collateral, is still $2 trillion.

"The temptation always is to lower liquidity levels when times are good," said Baylor Lancaster, an analyst at CreditSights Inc. in Miami. "That's why we need rules. In three years' time, are people really going to care about liquidity as much as they do now?"

http://www.bloomberg.com/apps/news?pid=20601109&sid=aN8ApDdiCwcA&pos=12

Supply fears start to hit Treasuries

I have two problems with this scenario.

1. When everybody knows about a problem, it doesn't happen.
2. When everybody understands a problem, it gets solved fast.

I'm betting on 2.

* * * * * J B K * * * * *

San Francisco

The bond vigilantes are finally flexing their muscles. A long period of stability for the US government bond market showed signs of cracking this week as a lack of investor appetite for new debt sent the benchmark 10-year yield to its highest level since last June.

For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Chart: TreasuriesFalling inflation, rising unemployment, the housing market slump, the Federal Reserve's policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.

But this week the mood shifted as yields for $118bn of new US debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the UK bond market after the government's budget ahead of a general election expected in May failed to resolve doubts over future spending and debt reduction.

http://www.ft.com/cms/s/0/c51fbbce-3908-11df-8970-00144feabdc0.html

Yellen Says She’ll Be Ready to Raise Rates When ‘Time Has Come’ - Bloomberg.com

Alan Greenspan in a skirt.

This is another San Francisco earthquake just waiting to happen.

Pray for the health and long life of Bernanke.

I am.

* * * * * J B K * * * * *

San Francisco

March 24 (Bloomberg) -- Janet Yellen, president of the Federal Reserve Bank of San Francisco, said that while it's too soon to raise interest rates, she'll be ready to do so "when the time has come."

Yellen said the Fed's pledge to keep rates low for "an extended period" was "appropriate" and that it made "no particular time commitment." In a speech yesterday in Los Angeles, she discounted concerns record budget deficits might fuel inflation.

"The Fed has to be ready to take away the punch bowl when it's necessary," Yellen told reporters after the speech. "When the time has come, am I going to support raising interest rates? You bet. I don't want to see inflation pick up."

http://www.bloomberg.com/apps/news?pid=20601068&sid=askizRCWdj2Q

Ackman’s Greatest Short - MBIA - Bloomberg.com

The mortgage insurance companies were the canaries in this coal mine. MBIA, MGIC, and PMI.

To anyone who was watching, it was obvious that there were too many adjustable rate loans made to people with insufficient down payments, bad credit, and low income.

All that was necessary for the cave-in was a sustained increase in short-term interest rates. The idiot Greenspan provided the impetus when in 2004 he started raising Fed Funds from 1% to 5.25%.

By the time it was over, all the mortgage insurance companies were destroyed, as were Fannie and Freddie, the mortgage market was in ruins, CDS issuers were bankrupt, and the economy was collapsing.

* * * * * J B K * * * * *

San Francisco

"Our newest and largest [short] investment is on an extremely highly levered, yet AAA-rated financial institution, which we believe has inadequate reserves, undisclosed credit- quality problems, aggressive accounting and substantial unconsolidated indebtedness contained in off-balance-sheet special-purpose vehicles," he wrote. The position had the potential to generate a return of about five times the fund's total assets if it was successful.

Though little known outside of Wall Street circles in 2002, MBIA ranked as one of the five biggest financial institutions in the country in terms of outstanding credit exposure. It shared that distinction with Bank of America Corp., Citigroup Inc. and government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

http://www.bloomberg.com/apps/news?pid=20601108&sid=aLmOb9zzVZ9A

JPMorgan Sells Debt: Credit Markets - Bloomberg.com

Lengthen those liabilities.

* * * * * J B K * * * * *

San Francisco

March 19 (Bloomberg) -- Financial company bonds are beating industrial debt by the most this year after lagging behind in February, encouraging investors to snap up new issues from JPMorgan Chase & Co. and Credit Suisse Group AG.

Debt sold by banks, insurers and brokers returned 0.81 percent this month through yesterday, compared with 0.4 percent for the rest of the market, according to Bank of America Merrill Lynch index data. The cost to borrow for banks is the lowest since February 2008, with yields falling to within 1.93 percentage points of Treasuries on March 18.

http://www.bloomberg.com/apps/news?pid=20601087&sid=abb54OIrjRFc&pos=6

Bank Regulators Issue Guidelines on Liquidity Risk (Update1) - Bloomberg.com

Our analysts are studying these reports and will have a comprehensive analysis for clients in a week or so.

There is nothing in either of these reports to immediately concern decision makers.

* * * * * J B K * * * * *

San Francisco

March 17 (Bloomberg) -- The Federal Reserve, the Office of the Comptroller of the Currency and four other bank supervisory agencies released guidelines for liquidity risk management to deter the funding practices that contributed to the financial crisis.

"Given the recent market turmoil, the agencies are reiterating the importance of effective liquidity risk management for the safety and soundness of financial institutions," the agencies said today in a release. The guidelines emphasize the need for diversified funding sources, stress testing and a contingency funding plan, they said.

The Fed and other banking supervisors are reasserting their existing authority without waiting for Congress to complete an overhaul of financial regulation. The agencies are raising standards for capital, liquidity and risk management, and increasing their control over compensation policies. In January, regulators issued guidance on managing interest rate risk.

http://www.bloomberg.com/apps/news?pid=20601087&sid=arGN45fk0JMQ&pos=4

The war on banks continues

It's bad enough that big banks are getting hit with new regulations, fees, and taxes.

Now community banks are feeling the same squeeze.

The problem is the administration in Washington.

They want the banks and related institutions to pay for the mortgage market blunders committed by the Congress and the regulatory agencies.

Economic growth will be hampered by the unwillingness of small banks to make loans.

* * * * * J B K * * * * *

San Francisco

"We're hearing complaint after complaint," said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America, speaking last week at the National Association of Attorneys General convention in Washington.

Bankers say a downgrade forces an institution to put more money in reserves, makes them reluctant to loan money and increases their FDIC premiums.

Those consequences are among the chief reasons many small businesses are finding it difficult to borrow money from their local, small banks, said Cole, whose group represents about 5,000 community banks with about $1 trillion in total assets.

http://legalnewsline.com/news/225958-community-bankers-decry-overregulation

Getting short the bond market

In the months to come there will be many opportunities to short the bond contract.

One of the best opportunities is provided by US Treasury auctions.

We are now in the middle of a $13 billion long bond auction.

Pay close attention to the way bonds trade for the next week or so.

Paterson advised clients to sell bonds at the 117.16 level with a 16 tick stop.

Traders will close out the position on the next major sign of weakness.

* * * * * J B K * * * * *

San Francisco

Money Numbers

The money supply is not going down.

MZM looks like its bottoming.
M1 is growing.
M2 is still weak.

Test

There has been a problem posting to this weblog.

* * * * * J B K * * * * *

San Francisco