More Fun With Interest Rates

While we’re on the topic, let’s review the spread we have on from 6/9, (S) US 10 yr, 2.99% / (L) Ger 10 yr, 3.03%, thus -4. That is, we expected US rates to head higher vs Ger. We also have an outright view but the qlt flt triggered by Greece illustrates that spreads can sometimes be a more conservative approach. Last on that spread +13 with the US leg at 3.10% and the Ger leg at 2.97%, thus US prices much lower, Ger prices higher from 6/9, a satisfactory result.

Two key factors inspired the trade: 1) our view for a US recovery and end to Fed meddling and 2) the reality that the ECB would soon brake given Germany’s real sector vigor.
　

Robert Craven

Just Ahead

We are reminded of early Q4, ‘10. Consensus was for a further slowing. We said no, and here is why. The economy blew through estimates into Q1, ‘11.

Now is a mirror situation. Again the market crowd are all looking in the wrong direction.

Instead, we will move nicely into year end.

Finally, we have isolated the turning point in interest rates, set June/9 at 2.99% on the ten year. Quality flt took us a tad lower, certainly, but that was temporary. Last, 3.11%. Year end - 3.50%.
　
Robert Craven

Handy Tool

We’re not EU insiders but any of us can get a clue re the Greek outcome, simply by glancing at Treasuries.

Recall that when world institutions think all hells about to break loose, they seek sanctuary, parking their loot in the safest location of earth - US obligations. Thus demand tied to fears of EU contagion drove Treasury prices higher and yields lower. Today we see that has reversed, institutions un-parking their cash, selling Treasuries, yields higher. Thus, the 10 yr printed a 2.88 June/24 (week of panic re Greece) from a 3.10% on June/14. Nothing has changed here, yet the 10 yr last is a 3.08 from a 3.04% yesterday, telling us world institutions are optimistic.

Robert Craven

Fun With Interest Rates

On June/9 we stated that this major cycle in lower rates had ended. The ten yr Treasury then a 2.99%, down from 3.34, Jan/4/11. In the old days, 35 bps was nothing; it’s a movement nowadays!

Since June/9, the 10 yr moved to a 3.10% (thank you) but then lower to a 2.93%. We did not anticipated the furor linked to Greece, which drove US rates lower (2.93%) based on quality flight. But knowing the business of the future is to be dangerous, we recommended a spread on June/9 as opposed to outright: sell the US 10yr (2.99%) / buy the 10yr Ger bund (3.03%), thus at a -4. That spread is last a +11 today (3.04% / 2.93%), a very satisfactory result, the10 yr Treasury lower in price, bund higher in price.


Robert Craven

Mark Twain the Strategist

"Whatever ... thing a consensus coppers, bet your money on that very card and do not be afraid," Twain wrote ("coppers" being colloquial for bets against). The good ‘ol consensus sure does get beat up regularly, and fittingly so. It’s fetched up a horrible track record.

At the moment, market view, world consensus is for a US slowdown, H2, and into year end.

We noted earlier that absent another major violent event in the Middle East, and absent another major intrusion by the Administration and/or by the Fed, that we will move nicely into year end.


Robert Craven

Week Ahead

Kids in the media (whose living depends on US economic releases) point out this pm that there is a lot on the burner this week. That is true but very little of it is important. The good ‘ol Jobless Claims release on Thursday and a Manufacturing survey on Friday pack some horsepower; the rest will come from offshore.

Germany has a couple of key releases, as does Japan; then there’s Greece. We have little direct exposure but some indirect exposure by the way of swaps. An outright default would impact us somewhat. But here is the key folks - this situation is fully on the radar screen. Q4 ‘08 was not. Thus this will not be a repeat by the way of breadth of destruction.


Robert Craven

Week In Review

It was pretty much all offshore - Greece and fears of contagion.

US signals were mixed.

Fed policy has stalled things here a tad, helped by our Arab buddies (gasoline).

More and more have joined us in the demand that the administration and Fed cease their efforts as planners. Then we’ll be just fine.
　
Robert Craven