Feb 4. Last year’s ten year low yield will not be seen again

–Not much net change in interest rate futures Friday; a short cover relief rally after employment data sputtered, and bonds made a new low settle. Pervasive weakness in yen is unrelenting. New high USDJPY to 92.80 and in EURJPY to 126.60, a 26% move in 2 1/2 months. The head of Japan’s Gov’t Pension Investment Fund (the world’s largest at $1.16T) is considering shifting some assets out of Japanese bonds and into emerging markets as yen devaluation policies are expected to cause an increase in JGB yields (BBG). This is just one indication of the huge ramifications of Japan’s strategy. According to the article, this fund has a 100 year horizon and rarely changes allocations. http://www.bloomberg.com/news/2013-02-03/japan-pension-fund-s-bonds-too-many-if-abe-succeeds-mitani-says.html   Another move correlated with yen has been the steepening of the US curve. For example, in mid Nov when EURJPY was around 100, red/gold pack spread was 115-120. Yesterday red/gold closed at a new recent high of 166, up over 4 bps on the day.
–I think there are several reasons for a structural shift to bearish sentiment in bonds, some of which were rapid, like the change in yen policy, and some of which have been much slower moving, like improvement in housing and the plunge in households’ debt servicing costs. I don’t even pretend to grasp the entire picture, but the fact that last Wed’s huge miss in GDP (-0.1 vs +1.1 expected) failed to spark buyers, and indeed was met with new sellers is as crystal clear of a warning bell that longs are ever likely to hear. Friday’s Dutch Gov’t takeover of SNS Bank resulting in capital wipeout of equity and junior bondholder stakes would have been another clear excuse to seek comfort in the safety of US treasuries. Didn’t happen. My guess is that we will not see 1.40 tens again unless all out military conflict erupts, and maybe not even then. That’s not to say we can’t see reactions back to lower rates. For example, the ECB should be slashing rates to counter EUR strength, but only last week the Davos elite concluded that the crisis has run its course. We’ll see what Thursday’s ECB meeting brings.
–I am not in the mindset that a newly energized US consumer is going to lead a global growth charge. There are myriad complex reasons that rates could set higher: a pull back in Fed sponsorship, an upturn in the velocity of money, an increased perception of capital risks in bonds. But the chart below on Households Financial Obligation Ratio (and I know there are some contrary explanations) is quite dramatic.


Household Financial Obligations as a percent of Disposable Personal Income (FODSP)

2012:Q3: 15.74359 Percent Last 5 Observations

Quarterly, Not Seasonally Adjusted, Updated: 2012-12-18 12:01 PM CST
Graph of Household Financial Obligations as a percent of Disposable Personal Income

Posted on February 3, 2013 at 1:31 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply