Yield Shoots, Dollar Leaves 12 comments
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Talk of Fed Exit Strategy is Premature. Yesterday's 23-basis point jump in 10-year yields to 3.74% may have been helped by mortgage backed securities traders hedging, but the upward trend remains clearly intact. With Fed increasingly behind the curve in catching up with US Treasurys relentless bond issues, 10 year yields have now retraced over 50% of their decline from their 5.32% high of June 2007 to their record low of 2.03% in December. The path is now paved towards the 4.1% market, last attained in October 2008. We cannot imagine the Fed sticking with its current plan to purchase $300 bln in treasuries when their yields are exasperating the fragile jobless recovery and further endangering the value of their foreign holders. The only solution so far is for the FOMC to step up purchases towards the $500-700 billion target, the implications of which will flash the green-light for dollar selling.
"Green Shoots" optimists, credit rating pessimists and bonds-to-stocks rotation realists have all provided arguments for the jump in bond yields. The acceleration could be extended by reduced portfolio weightings in government bonds and onto metals and agriculture. Portfolio re-allocations from fixed income to commodities may be uncommon, but central banks reflationary policies leave little choice for investors to pursue seek capital preservation strategies.
The chart above illustrates the USD index/10 yr yield index ratio, highlighting the ensuing retracement in the value of the greenback relative to bond yields after the ratio shot up to a record high of 37 in November. A rising ratio reflects an appreciating greenback relative to bond prices, while a declining ratio highlights the bonds underperformance relative to the US currency. The overshoot in the USD/Yield ratio of Q4 reflected the combination of violent repatriation flows into US treasuries, which boosted the USD and dragged down yields. The ratio, currently at 22 (80.9/3.7) is above its 39-year average of 15 and is bound for further declinesin line with broader retreat in the greenback.
The EURUSD chart below supports the view for continued gains towards the $1.41, followed by $1.47 by end of quarter. Meanwhile we could see an interim retreat limited to $1.3720-30s. The same applies for AUDUSD, whose support holds at 0.7650, while paving the way for 0.820
More Speculative Dollar Shorts Ahead. Last week's data from currency futures showed euro longs vs. USD exceeded the shorts by 12,250 contractsthe highest level since the week of July 15 (the week when EURUSD hit its record high). Meanwhile, yen longs vs. USD exceeded the shorts by 6,000 contracts, the highest since March. Aussie net longs vs. USD also hit their highest since July, reflecting the extent of deepening anti-USD sentiment among the speculative (non-commercial) community. Considering that EUR and JPY net longs vs. USD are about 11 times lower than their record highs, speculators have plenty of upside against the USD in terms of quantity as well as price.
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This article has 12 comments:
agree on aggressive treasury buying past the 300 B that is outlined. no re-fi or mortgage origination can be done on current yields. long dated maturity yield curve is too steep. bernanke will go into the market but any attempts will be futile as he can only manipulate the economy for so long. he will artificially suppress rates and they will revert back as investors will not have treasury auctions without getting nice yields. we will find ourselves in a liquidity trap. the only winner will be......if someone has an answer please fill in the blank
nice piece
Commodity based economies - Australia, Canada, Brazil, Norway.
Not sure about the EUR/USD trade, Europe has buried its head in the sand and is repeatedly saying 'there is nothing to see here'. When in fact housing is devaluing fast, unemployment is rising (8.9%) and sheeple are beginning to find their voice.
"Portfolio re-allocations from fixed income to commodities may be uncommon, but central banks reflationary policies leave little choice for investors to pursue seek capital preservation strategies."
Question is how sustainable such a strategy is and who blinks first i.e. when does the Fed have to start hiking short term rates?
Make that "exacerbating"
Europe is not burying it's head in the sand; It's doing what makes sense for Europe. Don't forget we are net borrowers we want low rates while Europeans are net savers and want higher rates. It's not in their interest to hold rates down.
On May 29 07:54 AM Clive Corcoran wrote:
> Agree with this comment entirely
> "Portfolio re-allocations from fixed income to commodities may be
> uncommon, but central banks reflationary policies leave little choice
> for investors to pursue seek capital preservation strategies."<br/>...
> is how sustainable such a strategy is and who blinks first i.e. when
> does the Fed have to start hiking short term rates?
I don't think the Fed will raise rates until the market forces them. After all, increased rates is going to blow BHO's budget to hell as well as his forecasts, if anyone relies upon government forecasts.
Please could you give me more information on how the Europeans are net savers?
As far as I am seeing from the EU - Spain, Ireland, Italy, UK, Germany, Portugal, Greece, France (lesser), Denmark! (lesser), Norway (much lesser), Sweden (much lesser) are all swimming in mortgage HUGE (much more than the US in MOST accounts) debt! Both household and CRE!
So net savers in a housing bubble?
Sorry to all the EU countries I missed out!
On May 29 03:34 PM Larry House wrote:
> when the Fed will
> tighten--when it is too late! Inflation will have escaped before
> they close the door.
How the process will work
12 months pass, they announce "12% inflation last year" There is public outcry. "We must do something", says the public. "OK, OK, when we meet again in the next three months" says the powers that be.
15 months have passed. "We have met and have decided that in three months. We are going to start to raise rates slowly."
The bottom line is that by the time the fix is in, inflation will have already done quite a bit of damage.
On May 29 10:06 AM Prudent Man CFA wrote:
>I don't think the Fed will raise rates until the market forces them. >After all, increased rates is going to blow BHO's budget to hell as >well as his forecasts, if anyone relies upon government forecasts.
Seriously would you buy? Because if you do I know about 50 brokers and brokerages who are dying to speak to you.