2-year yield: 87 bps
10-year yield: 370 bps
2s-10s spread: 283
Recommendation: put on 2s-10s flattener again.
Re-opening 2s-10s flattener
March 8th, 2010The Voting/Weighing Machine
March 7th, 2010Benjamin Graham:
In the short run, the market is a voting machine, but in the long run it is a weighing machine.
Brent Simmons:
So one thing I like doing is getting as much feedback on the possibly-to-delete list as I can. I don’t put things up to a vote, because a vote doesn’t tell me the why of anything, and that matters more than just numbers.
http://inessential.com/2008/07/22/more_about_deleting_features
The Brent Simmons quote has to do with software development, but if we keep in mind the above quote from Benjamin Graham, we can also apply it to financial markets.
Reminiscences of a Stock Operator
March 6th, 2010Good quotes from Reminiscences of a Stock Operator:
- The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to. A trader gets to play the game as the professional billiard player does – that is, he looks far ahead instead of considering the particular shot before him. It gets to be an instinct to play for position.
- Then we got a quotation – the only one that day: Anaconda, 292…It meant a paper loss to me of nearly one hundred thousand dollars. I had wanted quick action. Well, I was getting it.
- It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance. The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
The U.S. Trade Deficit with Japan
March 6th, 2010Previously, I examined USD/JPY in terms of valuation, carry, and momentum. We should also examine the U.S. trade deficit with Japan. The attached chart shows annual trade deficits with Japan starting from 1985. Last year’s trade deficit with Japan of $44.8 billion was the smallest since 1991 ($43.4 billion).
YCS closed at 20.07 yesterday. I recommended it at 19.31 on March 3, 2010.
Closing 2s-10s flattener
March 5th, 2010Yesterday, I wrote “Today’s initial claims report is worth paying attention to, but tomorrow’s nonfarm payrolls report is more important. I think we will see further confirmation of an improving employment picture, but this is by no means assured.”
Today’s nonfarm payrolls report was better than expected:
U.S. nonfarm payrolls declined for the 25th time in the past 26 months, falling by 36,000 in February to 129.5 million, the Labor Department estimated Friday.
Job losses were concentrated in construction, schools, retail and publishing. Manufacturing jobs rose by 1,000, the second increase in a row.
The unemployment rate was steady at 9.7%.
…
The employment report was better than expected, as economists surveyed by MarketWatch were forecasting a drop of 90,000. They expected the unemployment rate to rise to 9.8%.
Payroll data for December and January were revised higher by 35,000.
The 2-year yield is 91 bps and the 10-year yield is 367 bps, so the 2s-10s spread has flattened to 276 bps. I am closing my 2s-10s flattener recommendation with a profit. I initiated this recommendation at a spread of 282 bps on Feb 9, 2010. The curve may well continue to flatten, but I do not have a strong conviction about the 2s-10s spread anymore, so I prefer a neutral stance.
My recommendation to buy USD/JPY continues to perform well. USD/JPY is now 90.10. The increase in USD/JPY is a combination of the yen weakening on a report that the Bank of Japan is considering further easing measures and the dollar strengthening on the better than expected nonfarm payrolls report.
Japanese stocks jumped Friday, buoyed by a report that the country’s central bank was considering taking further monetary easing steps to shore up a recovery in the world’s second-biggest economy.
…
In December, the bank eased monetary policy by offering 10 trillion yen ($112 billion) in short-term loans to commercial banks to boost liquidity.
First Hoenig, now Bullard
March 5th, 2010http://www.reuters.com/article/idUSTRE6234TA20100305
A second senior Federal Reserve official on Thursday joined the ranks of those doubting whether the Fed should continue to commit to hold rates exceptionally low for an extended period, a sign pressures are building to drop the wording.
The curve continues to flatten. The 2-year yield is 86 bps and the 10-year yield is 3.61 bps, so the 2s-10s spread is now 275 bps. The dollar continues to strengthen against the yen: USD/JPY is now 89.24.
U.S. Unemployment Claims Fell to 469,000 Last Week
March 4th, 2010http://www.bloomberg.com/apps/news?pid=20601068&sid=alAMN_KVoQ6M
Initial jobless applications fell by 29,000 to 469,000 in the week ended Feb. 27, in line with the median forecast of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance decreased to the lowest level in a year, while those receiving extended benefits climbed.
So far, my trade ideas are performing well. 2-year notes now yield 86 bps and 10-year notes now yield 364 bps, so 2s-10s has flattened to 278 bps (I recommended a 2s-10s flattener at 282 bps). Two days ago, I wrote that I thought that 2-year yields would go higher. 2-year notes were yielding 81 bps two days ago and now they yield 86 bps. I wrote a bullish post on USD/JPY yesterday when the exchange rate was at 88.72; now USD has strengthened vs. JPY to 89.01. Two and three days ago, I highlighted the improving employment picture (“Firms Move Gingerly to Rescind Salary Cuts” and “The unemployment rate is starting to turn”).
Today’s initial claims report is worth paying attention to, but tomorrow’s nonfarm payrolls report is more important. I think we will see further confirmation of an improving employment picture, but this is by no means assured. A weak payrolls number could easily turn my winning trade ideas into losers. However, 2s-10s, 2s, and USD/JPY are at such extreme levels that even if tomorrow proves to be a bad day for my trade ideas, I feel confident that they will pay off eventually.
Greece: extra austerity measures
March 3rd, 2010Greece decides on 4.8 billion euros in extra measures
Greece’s cabinet on Wednesday decided to take extra austerity measures totaling 4.8 billion euros ($6.49 billion) to ensure it meets key fiscal targets this year, a government source said.
“Measures which will yield 4.8 billion euros have been decided,” the government official who took part in the cabinet meeting said. “Half will be from spending cuts and another 50 percent from tax increases.”
The measures include an increase of value-added tax by 2 percentage points to 21 percent and trimming public sector salary bonuses by 30 percent, the source said.
We should see an unwind of flight-to-Treasuries soon.
USD/JPY
March 3rd, 2010Let’s examine USD/JPY in terms of 1) valuation, 2) carry, and 3) momentum.
1) http://fx.sauder.ubc.ca/PPP.html shows the yen to be overvalued relative to the dollar by about 30%.
2) There is no significant difference between USD and JPY overnight interest rates, so USD/JPY is basically carry-neutral. However, the Treasury and JGB yield curves indicate that the market expects the Fed to be much more aggressive than the Bank of Japan in hiking rates.
| Treasury | JGB | |
|---|---|---|
| 1-Year | 0.29% | 0.12% |
| 2-Year | 0.80% | 0.16% |
| 10-Year | 3.61% | 1.30% |
| 30-Year | 4.57% | 2.32% |
Long USD/JPY positions should have positive carry within a year or two.
3) Regarding momentum, the attached image tells the story: the dollar has been in a multi-year downtrend vs. the yen. It has been nearly three years since USD/JPY peaked at 124.09 (FRED daily closing values), so yen strengthening may have run its course.
USD/JPY
I am bullish on USD/JPY (bearish on yen). Right now, USD/JPY is at 88.72. I think we will see USD/JPY above 93 within six months. YCS (UltraShort Yen ProShares) closed at 19.31 today.
Recommendation: buy USD/JPY or YCS.
2-year notes
March 2nd, 2010I think 2-year notes yields will go higher (2-year note prices will go lower).
- The Fed has hiked the discount rate. There is not much practical significance to this action – what matters is the Fed Funds target – but I think it provides an important indication of a shift in the Fed’s thinking.
- The Fed’s QE programs are about to end
- The unemployment rate is starting to turn. It went to 10.1% in Oct 2009 (the highest level since June 1983), then it dropped very slightly to 10.0% in Nov 2009, and then it dropped again to 9.7% in Jan 2010. It remains to be seen whether 10.1% in Oct 2009 is THE peak, but it is at least A peak.
Right now, 2-year notes yield 81 bps. I think we’ll see 2-year note yields rise at least 20 bps within six months.
Recommendation: short 2-year notes (or sell 2-year note futures).