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March 15, 2006

Big bounce in bonds, Wed., Mar. 15, 2006, 6:23 AM

After reaching a 27-month high in yield in the 10-year U.S. Treasury, reaching 4.795 on Monday, there was a major correction in the bond market yesterday as the yield dropped to 4.68.

Depending on the economic data that will be reported and what the Fed intends to do with monetary policy, the bond market could continue to bounce, and that would be enough of a driver, I feel, to lift equity prices higher.

Do I think bonds will continue to bounce? There has to be some considerable softening in the economic data, and some considerable slowdown in growth of the money supply for that to happen, and I think most analysts are thinking that such a scenario is unlikely.

So my thinking today is that after a brief corrective rally in bonds, there is going to be more selling ahead, which means higher rates to come.

And that is not a positive outlook for the equity market.

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Posted by Posted by Bill Cara on March 15, 2006 06:23:35 AM | Category: Bonds

Discourse

TIC data out at 0900, but I haven't seen it yet.

"Definition
These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities. Why Investors Care

Why Investors Care?
TIC data have been issued for the past 30 years, but only recently, due to an enormous rise in foreign participation in our markets, have they grabbed the attention of the international financial markets. Although methodologically limited, TIC offers a measure of foreign demand for our debt and assets. Bonds and the dollar are most sensitive to the data, therefore bond and foreign exchange markets are more likely to react to this report than the equity market.

Strong inflows (demand for U.S. securities) are needed to keep downward pressure on interest rates. Strong inflows also underpin the value of the dollar since foreigners must purchase dollars in order to buy our securities. A strong dollar helps to maintain stability in all U.S. financial markets. Since foreign ownership of U.S. equities is comparatively small, the equity market is less concerned about this report...."

http://www.nasdaq.com/asp/econodayframe.asp?page=http://www.nasdaq.com/econoday/index.html

Posted by: spot [TypeKey Profile Page] at March 15, 2006 9:12 AM [link]

Bill,
Did you see the Japan # within the TIC data? It sold a net $16.6 billion of U.S. Treasuries in January, its largest sale ever. Since Japan is the largest holder of treasuries, that can't be a good sign for either bonds or the USD. Your thoughts?

Posted by: josh [TypeKey Profile Page] at March 15, 2006 9:49 AM [link]

Miners are continuing to strengthen vis a vis bullion price. Normal for a three day uptrend but still that is a bullish indication. Need to see what they do on a sell-off. If maintain strength that would be a Board Aside The Head clue that worst is likely behind us. First indication was given last Friday as I posted.

Posted by: MarkM [TypeKey Profile Page] at March 15, 2006 11:12 AM [link]

josh-
I'll give you MY opinion. Nice to be long gold, that's what. I would not have expected JPN to become net sellers. No new purchases, yes, but not outright net.

Dollar still under pressure but that little bond glitch is getting some attention as Bill and I pointed out this morning. It would be nice if gold held its gains here but the bond market gives The Boys a cover for trying to take it back a notch.

Posted by: MarkM [TypeKey Profile Page] at March 15, 2006 11:27 AM [link]

Okay, gold gains peeled off to a buck and change(spot). Bonds off and yields rallying strongly. Oil off(so far). Call it a Meat Loaf day--"Two Out of Three Ain't Bad"

Posted by: MarkM [TypeKey Profile Page] at March 15, 2006 1:50 PM [link]