The US and Canadian government bond market took it on the chin this morning.
It’s been a long time since we saw a real bond sell-off, reassuring that people would finally reject this paper in “la la low rate land”.
But I think the carnage in fixed income is over (for now) as there aren’t many alternatives to earn interest with world-wide rates being so low in the G-7 nation group.
I won’t go into the currency aspects of the sell-off right now; it is a well-covered subject in the media.
Suffice to say, the equation is euro down = USD up = commodities creamed.
The 30 year Treasury December futures were down half a buck to 125 16/32 just an hour ago. It has bounced back to up eight ticks and looks to be going higher.
T-bonds traded at 135 (per $100 principal amount), a month ago, a long slippery slope and ringing lack of endorsement of QE2 Federal Reserve easing. The 10 year also has been down but not as much.
The 10 year Canadian GOC had broken through 3.0% yesterday and is currently trading at 3.10 after reaching 3.12%. The Canadian dollar almost always suffers from seasonal year end weakness and is trading at 97.65.
The bond sell-off seems to be related to the “Irish Panic” coming to a head with a government announcement regarding a potential EU bailout, expected shortly.
Commodity, financial stocks and general market indices are all down. Usually bonds would rally on this information, but this is not a normal market.
DJIA is currently 11,020 down 183 points after being down 200. So far it’s a successful test of 11,000.
The S&P/TSX index is down 190 at 12,545 on a sharply lower gold price ($1,334 down $33).
We warned about the rising long term bond yields, last week in our November 10 report:
We have the US ten year note at 2.73% - it was 2.57% Tuesday after the $24 billion US treasury auction netted buyers an average yield of 2.636%. A month ago, the ten year Treasury yielded 2.35% - a disconcerting trend towards higher rates.
You have to follow bond yields to gauge what to do with high dividend paying stocks such as financials and telecoms. Today’s bond sell-off is already over.
Since I feel the bond market sell-off is peaking with no inflation in sight (core US October PPI was negative), we continue to like to hold BCE, CM, BMO and XFN, the Canadian Financial ETF. We took some profits on TELUS “A” @ $43.30-5 but will be buying it back below $42.90 to yield 5%, backing out the near-term payment.
Canadian preferred shares which have not responded yet to the bond market mark-down and we feel these are vulnerable to a pull-back. (IGM.PR.B, RY.PR.W).
It’s been rough ride on the commodities side with US and Canadian fertilizers down sharply in the wake of the much anticipated walk away by BHP (BHP) from PotashCorp (POT).
Someone took a saw to forest products, particularly lumber but also pulp makers. March 2011 CME lumber futures are at $277.70/tbf down $6.90.
The US trade complaint against B.C. stumpage fees may be gathering steam. There is no point selling the issues we have been recommending, at these levels.
It’s probably part of the general sell-off in commodities today. We have October US Housing Starts tomorrow and API energy numbers released tonight, which should determine where wood and oil are going short-term.
We believe holders of quality, dividend paying stocks will be rewarded with a “Santa Claus” rally after the Irish solvency issue is addressed by the EU.
We think fears that the credit scare will spread to Portugal and Spain are overdone.
We are looking for good Canadian bank Q4 earnings based on strong capital markets trading and underwriting profits gained during the August-October bull market rally. Earnings kick off December 2nd with TD and CIBC followed by the Royal on December 3.
Hang in there and watch those bond yields!
Disclosure: Long stocks mentioned, no bonds
