Wednesday, March 18, 2009

10-Year Treasury Yields Fall Most Since 1962



Still think rates are set by the market?

In the words of Nobel Laureate economist, James Tobin, "Interest rates are a parameter set by the central bank." Period!! (My emphasis.)

The Fed said its wants rates down and guess what? They went down--big time!

(Keep shorting Treasuries, Jim Rogers! When you're broke hopefully we won't have to listen to you anymore.)

On a similar note...a central bank has infinite power to weaken its currency. I am not talking about the Fed, whose statement today carries zero implication for the dollar whatsoever. I am talking about the Swiss National Bank's statement last week, where it said that it would intervene to keep the Swiss franc down. Bet against this at your own risk. Go with it and, with patience, you'll make a lot of money!

15 comments:

Matt Franko said...

Mike,
All of this and they haven't really bought any yet!

Do you think the rally can be extended when they actually start to buy?

Resp,

STF said...

I was hoping they wouldn't buy Tsy's, but instead would buy non-Tsy's, for 2 reasons . .

1. The issue isn't Tsy's being too high, since 10y was already at 3% or lower. The issue was the spreads of other rates over Tsy's. They should just set a target for those spreads directly (which raises another point . . . why do they think they need to give a qty? just announce the spread and let qty float).

2. As Tsy rates now will stay "artifically" low, those who think "markets" set Tsy rates will just say the Fed was "monetizing" Tsy's to keep rates down. If they didn't touch Tsy's and Tsy's stayed down anyway (given no expectation of rise in fed funds rate), economists and the financial press would have to accept (perhaps--they probably would find some other irrelevant excuse) that something other than "markets" set Tsy rates even as record Tsy's were issued.

googleheim said...

1. A market condition can influence a central bank to lower it's rate but it is not a given, it is the result of the central bank's decision and reaction to the market it sees.

2. Question: if the market DID determine the rate, what would be the result in Switzerland and USA and EU ?

3. By lowering rates, currencies are lowered. But if the currencies are "floating" then the rates need to be "floating" but how does that happen ?

Mike Norman said...

Matt,

As a trader of many years I'd have to say that the move has discounted much of the actual buying pressure, however, bond prices are not likely to back off much.

On another note, I do expect at some point that the rating agencies will downgrade U.S. debt and there will be a big reflex selloff in Treasuries. However, when that happens, if the Fed still wants rates at zero, that is the mother of all selloffs to buy.

Case in point: Japan's bond market recovered most of its losses after the 2002 downgrade to the level of Botswana.

Mike Norman said...

Scott,

1. I totally agree. As Warren always says, it's a matter of price, not quantity. (The price determines the quantity.) They could have just said they want long-term rates at X%, simple. I think they stated an amount to provide shock and awe and some members of the committee really don't understand. The DO think it is about quantity--always.

2. If the Fed were monetizing then the Gov'ts account at the Fed would be credited and you'd have no increase in reserve balances. Sure, the gov't could then spend out of that account and this would increase reserves, but this is not what is going on. The Fed is buying from the public, not monetizing. The whole concept of monetizing is stupid anyway in the current paradigm because the gov't NEVER needs a "buyer of last resort" by definition since it spends by merely crediting bank accounts. But you'll just be beating your head against a wall trying to convince people of that.

3. In my opinion the Fed should be buying stocks, through some broad index (an index of all stocks publicly traded that the Fed itself could construct). This would achieve two goals: first, it would continue to expand the monetary base if that is their desire, which it seems to be; and second, it would restore some household wealth via the rise in stock portfolios, bolster firm capital, perhaps even add to income through higher dividends. In addition, the ensuing sale of Treasuries, if any, would add to non-gov't sector financial assets above and beyond what the effect that came from higher equities. Unfortunately, they'll never do it and if they did, there'd be a huge outcry from people saying it was "Socialism." Funny thing is, Japan did this with success back in 2002 (limited to bank stocks) and JP Morgan did this back in the Panic of 1907. The panic ended shortly afterward.

Anonymous said...

Matt,
This is what happened in November when the Fed announced that it would purchase mortgage backed securities. (historic first) MBS immediately began to rally. The FNMA 4.5% 30 year bond closed at 101.81 on December 12 and conforming 30 year fixed rates had moved to the 4.5 - 4.75% range.
The Fed didn't begin puchasing MBS until the beginning of January. Jan 8-9 4.5% bond found new ceilings of resitstance at 103.31 and 103.62 and retracted from there since. That is until Mar 18 of course. The bond closed 138bp higher at 103.21875 and up another 6bp yesterday and is flat this morning.

If November to January is any indication of what we can expect from here through June then it's very possible the rally will continue and mbs move higher.

Mike Norman said...

Good observation Jill!

Matt Franko said...

For angel:
Ive been following the progress of the Feds MBS purchase program. As of last Weds. the Feds H.4.1 report only accounted for about 68B of MBS purchases. However the NY Fed has been reporting weekly the progress of the sub-contractors at PIMCO and Blackrock et al, and the NY Fed reports trades of over 200B. The NY Fed website says that the MBS wont appear as assets in the H.4.1 until the trades settle. So that may mean that over 150B of these MBS trades have not settled yet, in fact NY reported over 68B in just January, so net, no trades have settled in Feb or March, do you know why this would take so long to settle?
Per the H.4.1, there was a big 55B settlement in week ending 2/18/09, and the 10yr Treasury had a nice mini rally leading up to that date, what did the MBS you track do in the week ending 2/18/09?
Also, my guess is that if the MBS trades have not settled and do not appear in the H.4.1, then no new reserves have been created yet, and hence the sellers do not have the new reserves to re-deploy in the marketplace. What do you think would happen if the 150B of new reserves all of a sudden show up in a short timeframe after settlement?
Appreciate your feedback as I do not have visibilty into the actual MBS market.
New info will be out for week ending yesterday at 4:30 so progress may have changed will update if so...
Resp,

Matt Franko said...

H.4.1 report out now today. (4:30 Eastern)
It indicates that $157B of MBS trades settled this week.
Does it then follow that the reserves were created this week also and then 157B of new reserves invested probably in fixed income in less than 1 week and helped to create the biggest 1 day rally since 1962?
Im going to continue to follow these trades vs. settlements and if settlements fall behind trades by 150B again during this year perhaps it will make a good trade?

Mike Norman said...

Matt,

I see the $157 and it's a huge reserve addition for the week. The rally clearly could be dealers jumping in ahead of actual purchases by the Fed.

Anonymous said...

Matt,
I see same numbers you are referring to and sure enough, 157,555 settled in the week ending Mar 18. It's interesting but I don't know why it worked out that way. My hunch is that it is not relevant to the day to day trading of mbs. I keep a close eye on mbs trading but candlestick charts, not data, is my focus. The 2 and 10 year Treasury notes are on the page as well though I give little to no attention to them. As Mike points out, the traders are reacting on the news. So long as the Fed is buying mbs and treasuries I think timing a trade will come down to pure luck. It's not a "free market" right now and that changes everything.

Matt Franko said...

Angel thanks for the feedback.
Can you point me to a website to get quote info. on the FNMA MBS that you follow & chart?
Thanks.

Anonymous said...

Matt,
I'm happy to oblige but you'll need a ticket to see the show. Drop a note to Mike asking him to forward your email and I'll be in touch.

Matt Franko said...

For mortgageangel:
I was looking for a published index that would be available via Yahoo or Google that tracked some sort of industry wide MBS index instead of a data service.
Thanks for your response though!

Resp,

Anonymous said...

Matt, It is published but to member/subscribers only. I'm at liberty to share so, if in the future... ;-)