By Isobel Kennedy
NEW YORK, Nov 19 (MNI) – The Treasury market gave up some ground Monday but
no one is making any bets on its direction for the near term.
The 10-year Treasury note rose in yield to 1.62% early Monday from its
closing level of 1.57% last Friday. Higher stocks and hopes of a political
compromise on the fiscal cliff were blamed for the move.
But looking ahead to the next few weeks, it does not appear that anyone is
in the mood to make any big bets one way or another.
Treasury 10-year notes were yielding about 1.80% at the end of October and
reached an intra-day low yield of 1.55% last week.
David Keeble, global head of rate strategy at Credit Agricole, said the
U.S. elections coupled with fear of the so-called “fiscal cliff” were
responsible for about 15 to 20 basis points of that yield decline. And concerns
about Greece and the tensions between Israel and Hamas made up the rest.
Keeble also points out that the U.S. employment data and news on the China
economic front have been better than expected since the end of October so they
had nothing to do with the yield decline.
Now the bond markets are watching many factors. The U.S. fiscal cliff is
the most important, of course, but no one expects action or even more rhetoric
until Congress returns next week.
This should be a quiet week for the U.S. markets because of the
Thanksgiving Day holiday on Thursday and an early close on Friday. Japan is
closed on Friday.
On Tuesday, a special meeting of the eurogroup will decide whether to give
Greece another cash disbursement. If so, that would be a good sign and the
markets can then turn total attention to Spain.
At this juncture, the Treasury market could go several directions and no
one is willing to make any large bets. The 10-year note could reach for 1.50% or
head back nearer to 1.80%.
Greece could get solved and Spain could fall apart.
Stocks are holding in well for now, but a few of the wrong words out of
Washington, D.C. could erase those gains in a jiffy.
The situation is the Middle East is unknowable for now.
Real progress of the fiscal cliff – whatever that is, by the way, could
send yields higher and that would be a welcome relief. But it seems no one is
expecting anything on that front for until next week or longer.
Economists at Bank of America Merrill Lynch offered a realistic assessment
of the negotiations on the fiscal cliff and the debt ceiling in their weekly
piece.
They said that last Friday’s meeting between President Obama and the
congressional leaders “was a nice baby step toward resolving the fiscal cliff”
but they “still expect a number of false signals, painful negotiations, a deal
within weeks before or after the cliff, and further tough days in the market.”
They also added that in recent years many budget agreements have fallen
apart when the leaders revealed the details of the agreement to their caucuses.
“The best example of this was when Obama and (Republican leader of the
House John) Boehner were close personally on a grand bargain during the fall of
2011, only to have it quickly unravel when it saw the light of day,” BAML says.
Minutes from the Federal Reserve’s meeting on October 23-24 were released
recently and that has the markets focused on the expiration of the Fed’s
Operation Twist at the end of December. Under Operation Twist, the Fed sells $45
billion of short-dated Treasuries each month and buys a like amount of
longer-dated Treasuries with the proceeds.
Based on the Fed’s minutes, some think the Fed will either extend Operation
Twist or convert it to a “buy only” program when it runs out at the end of
December.
But the timing of the fiscal cliff could muddy the waters since the next
Fed meeting is December 11-12 and a compromise on the fiscal cliff might not be
in place yet. And does the Fed want to extend or adjust Operation Twist if a
solution to the fiscal cliff is indeed coming before the end of the year?
Let’s see of Federal Reserve Chairman Ben Bernanke sheds any light on this
topic when he addresses the Economic Club of New York Tuesday evening at 19:15
p.m. E.T. His speech will be followed by 20 minutes of questions from former Fed
Governor Alan Blinder and Harvard Professor Martin Feldstein. Surely the fiscal
cliff will come up.
While this might be a quiet week in the U.S., there is no reason to
unfasten your seatbelts just yet.
On Monday, October existing home sales rose 2.1% to 4.79 million at a
seasonally adjusted annual rate. That was higher than the 4.74 million expected
but September was revised down to 4.69 million.
Months of inventory is now down to 5.4, the lowest since February 2006.
More impressive is that the raw number of units for sale, 2.14 million, is at
the lowest level since December 2002.
Hurricane Sandy, which hit in last three days of October, depressed sales a
little, but the greater impact will likely be felt in the November/December
reports, the National Association of Realtors said.
Even then, though, the impact will be to delay rather than cancel sales,
and with that region comprising only 5% of units nationwide, the ultimate impact
is not expected to be that great.
National median price are at $178,600, a rise of 11.1% from one year ago.
On the fundamental front, the latest U.S. Census data shows that household
formation is back to near normal after five years of suppression.
The November National Association of Home Builders/Wells Housing Market
Index rose 5 points to 46. This was the seventh gain in a row and it is now at
the highest level since May 2006. Builders have reported increased demand, tight
supply and improving conditions. Two out of the three components gained in the
survey.
The component “gauging current sales conditions” posted the biggest
increase, with an eight-point rise to 49, its highest mark in more than six
years. Six month sales expectations rose two points to 53, and traffic of
prospective buyers held unchanged at 35 following a five-point gain in the
previous month.
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury
trading rooms, as well as some sister market trading rooms, and is offered as a
gauge of the mood in the financial markets. It is not necessarily hard, verified
news.
** MNI New York Newsroom: 212-669-6430 **
–email: ikennedy@mni-news.com
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