Market Observations From Gleacher's Russ Certo

From Gleacher's Russ Certo

Couple of quick items.  I think there is a confluence of items affecting the bond market which may account for a 3 point rally in the bond on a day when the debt limit is increased, an oxymoron.

Fundamentals!   I had noted last week that I think that if nothing more than symbolic that once the debt limit debate passed (a hope) that the market would aspire to simply trade on economic fundamentals, which is something market’s haven’t been able to do seemingly for years now.  Economic fundamental catalysts would immediately trump developments and all eyes would “move on” and focus on the weakest GDP revision last week that I can remember in my career.

Coupled with weak ISM these collective readings would portend and crystallize a less than robust view of Nonfarm Payroll and EXPECTATIONS of such.  There would be an extrapolation right to Friday along with collective shop GDP forecast downgrades to pile on and the like. 

Introducing another concept, MUDSLINGING on Capital Hill with the incessant focus on “compromise” and ugly battle royale of all things debt limit would be having a REAL TIME impact on consumption, which would NOT be reflected in the recent sup-par data releases.  This is NEW drag on economy as the damage is done to CONFIDENCE and consumption.  We likely haven’t seen the full effects of such and even mainstream archaic tanker slow moving economic statistics, like GDP, may not even capture the real time nature of these things. 

There were some thinkers espousing some other catalysis to the spastic price action yesterday and allocations in markets which bond market also benefited from.  ASSET WEIGHTINGS.  This concept is born in the fact that IF a ratings downgrade occurs to U.S. debt, which would be associated with some investors fleeing the asset class, the opposite could, in  fact, occur as the threat of downgrade could actually attract buyers of Treasuries.  How?

Investors have portfolio rating buckets if you will whereby a certain PERCENTAGE of assets have to be high(er) quality.  The inference goes that a downgrade would consequently downgrade “other” assets and managers would ironically have to re-weight their portfolios with higher quality assets again, Treasuries.  Circular and confusing but some have definitely considered that a regiggering of portfolio rating buckets is occurring, just in case of a downgrade and actually bringing in BUYERS in the space vs. other asset class to keep weightings. 

Other sensible comments are that a host of countries are struggling with appreciating currencies.  We don’t have to be too concerned about that here in the United States, unfortunately as our purchasing power is declining on a global basis in dollars.  However, the upshot, as we see with Switzerland with a rate cut to weaken its franc this morning (down only 1.20% as of this writing reversing earlier weakness), is that other regimes are struggling to adjust with global inflows.  In Brazil, for instance, taxes and other currency control type maneuvers are increasingly being imposed to deter global safe haven monies from being to HOT for their own respective economies. 

This also has an auxiliary affect on U.S. bond market as Swissy, JAPAN, Brazil, others etc. increasingly prospectively have dollars purchased vs. their currencies TO INVEST, finding its way to our rate structure.  Further, we get the sense that increasingly TARRIFFS and other nationalistic schemes  could ensue in the spirit of countries protecting their domestic production/consumption/isolationism/nationalistic tendencies, which also comes at the expense of global economic activity, another benefit for bonds. 

There also was some chatter that insurance companies were active yesterday as being overweighed equity space and underweight bonds, strips, long end.  There is no doubt that the more rate structure rallied that buyers were increasing seeking yield and extending instead of flighting to quality in the front end.  The curve reflected this yesterday wish significant flattening bias.

Quietly, some of the off-the-run Treasuries also began to underperform given poor global liquidity function expressing itself in the NEED to raise cash (sell what you own off the runs) and guessing what your peers would do and a sign of global stains.  Can discuss. 

This isn’t just a risk on/ risk off equity and risk asset allocation pedestrian equies to bonds flight to quality.  It’s about FUNDAMENTALS.   

Today brings more adjustments and will be real brief to highlight a few as need to get back to business.  Consider a refunding announcement at 9am in the form of supply of 3yrs, 10s, 30s.  Again, as noted the other day, would think steepening bias and price concession.  Hey!  Location, location, location. 

Also, consider the “slugs” window opens today from what we are hearing.  This makes sense as this was one the first programs that the Treasury scrapped to stay under the debt limit.  “State and local government securities” or “slgs” (slugs) are non-marketable debt that the Treasury was selling to munies directly.  With the window “shut” flows were finding their way into the marketable bond market and mostly the front end.  Now with this function occurring, this particular genre can go back to Treasury and generally would be less supportive of technical valuations created in the front end.  The front end of the bond market which was capturing these flows until today.  Maybe, bills, short coupons, and front end zeros lose a bit of luster on this?  Who knows. 

Hey, be careful out there.   Russ

Comments

[Beau Tox]

How could one trust the opinions of an economics 'pundit' that misspells the word tariff IN ALL CAPS?

[Sunshine n Lollipops]

Wow. The CHF intervention's intended effect lasted a whole 10 hours.

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