Monday, June 18, 2007

Monday morning quarterbacking

A few days ago I was concerned on the TREND change in global rates, interesting piece in The Times by Kaletsky this morning, he names four major factors in the low yield environement;

1. Regulatory and account pressure on pension funds to shift their portfolio from equities to bonds.

2. Japanese savers desperate need for yield ...

3. Currency manipulation by Asia

4. Sovereign Wealth Funds

1+2 is still in place, so 3+4 may have changed! MAY? Are you freaking joking me?

China sold 5.8 Bln. US of government bonds NET last month - 1st drop since October 2005. Mind you they still go an easy 414 bln. US or 10% of the total outstanding debt! (foreigners own more than 50% of US debt overall)

Sovereign Wealth Funds, SWF, have 2.5 trln. USD under management according to Morgan Stanley report - same institution says the move FROM fixed income to equties will increase long-term yield by 30-40 bp.

But.. here we re-enter the real world, there is serious evidence June-September Quarter is very seasonally positive for bonds:

Measured by 10-y notes generic yield the move in bp direction has been since 1995:
-2.26 bps for June-September, 1.47 bps for March-September

This ties pretty well with CONSENSUS (If you could hate words Sociademocratic & consensus would top my list!) that Core-Inflation will be waning over the course of the summer.

More interesting for us contrarians is the move SEC to remove the Tick Test, or the short-sell rule of NYSE. The rule says short sellers can not go short a stock they dont own unless it has been paid. This maybe hubris ?

The most intesting topics though is how New Zealand again intervened to no luck. However despite being libertarian, I firmly believe that when Central banks decides to make a stand, the do make a stand ... remember 2000 and EURUSD intervention ? That the market tests them is only natural, ultimately ALL central banks and politicians who believe they can CONTROL the markets will fail and pay the price.

I note the increased tension in the Middle East; Barak tells Sunday Times he will launch a military offensive against Hamas in the Gaza Strip. (Sorry for taking you back to the REAL world!)

I am humbled, which is hard yes, by how the performance of carry-trading continues.

Table I: G-10 carry-basket ( 916 bps ...Sharpe 1.65%)

Money machine? Sure does look like it! Well something will have to give - do not miss week-end press on how Bear Stearns Internal Hedge Fund is strugling to find new investors. Merril Lynch sezied 400 mio. in assets and are looking to auction these off later in the week!!!!

Nice colleagues!

Well, bottom line here; data is too light to change the direction of late last week, so bar some new escalation in Middle East and no spill-over from Bear Stearns Hedge Fund - the carry-traders will be in place. I am slightly disappointed about market reaction to Friday, but I am sure most people by Wednesday will think like me; Why fight the windmills?

Fund is short US dollar vs EUR. Long NASDAQ. Very little VaR at play while we recover from beig so wrong last week. MTD: +14 bps. YTD: 43 bps.

Steen


2 comments:

Agustin said...

Steen, Kaletsky's 4 points mean essentially the same: an increase in the supply of loanable resources. The key to the bond market, however, may be the change at the margin in the DEMAND for credit. That paints a rosier picture of the change in rates. Regards, Agustin (www.liquidityblog.blogspot.com).

Saxo Macro said...

Agustin, absolutely, and todays piece is about that change, which again seems to be lead from subprime