Posted by John_NorCal on 9/21/07 9:55am
Msg #212409

Treasury bills tumble

This came to me in an email this morning. I also read in the NY Times that the dollar is considerably weaker against the euro ($1.40 US to e1.00) and the Canadian dollar ($1.0008 US to $1.00 Canadian), not good for interest rates, especially adjustables tied to the LIBOR.

Common logic would suggest since the Fed lowered rates then mortgage rates should fall as well. Unfortunately, not the case. Now there are fears of inflation which effects the value of the dollar. Should the dollar weaken then bonds become less attractive to investors, see article below. As of 8:28am MST the 10 year yield was up 11/32 with a yield of 4.65% (this time yesterday it was 4.59%) and the Dow was up 85 points to 13,852.

Reply by John_NorCal on 9/21/07 10:06am
Msg #212414

Re: Treasury bills tumble- Here's the complete article- Long

Treasurys tumble on inflation fears
Prices continue to fall on fears that the Fed rate cut will spark an increase in inflation; Saudi Arabia may stop buying U.S. bonds.
September 20 2007: 5:20 PM EDT


NEW YORK (AP) -- Long-term Treasurys endured a third straight brutal selloff Thursday, hit by worries that inflation will accelerate and Saudi Arabia may lighten its Treasury holdings.

Treasurys began falling sharply on Tuesday, pushing their yields higher, on fears that inflation will accelerate because the Federal Reserve radically cheapened the cost of money this week by cutting interest rates by a half-percentage point.

Lower U.S. rates also damaged the dollar's standing against the euro and some of its other major rivals, a development that in turn has the potential to make Treasurys less desirable. Foreign governments with dollar-based currency reserves generally make Treasurys their asset of choice, but a deteriorating dollar could cause them to opt for other instruments.

New rate developments overnight in the oil-rich Persian Gulf states kept a spotlight on the possibility of foreign governments turning against Treasurys.

The benchmark 10-year Treasury note closed a full point lower at 100 20/32 with a yield of 4.67 percent, up from 4.52 percent at Wednesday's close. Heavy selling following the U.S. rate cuts has driven the yield on the 10-year note 4.5 percent higher since the rate cut. Prices and yields move in opposite directions.

The 30-year long bond endured the heaviest selling pressure and closed down 1 24/32 at 100 25/32 with a 4.95 percent yield, contrasting with 4.82 percent on Wednesday. The 30-year yield has appreciated 4.9 percent in the aftermath of the rate cuts.

The 2-year note has been under less pressure. It is down 2/32 at 99 28/32 with a 4.05 yield, up from 3.99 percent on Wednesday.

The yield on 3-month Treasury bills ended at 3.70 percent, down from 3.82 percent on Thursday, as the discount rate fell 0.11 percentage point to 3.70 percent.

Did the Fed go too far?
Overnight, the United Arab Emirates and Kuwait, the second- and third-largest economies in the Gulf region, both followed the Fed's lead and dropped rates. But Saudi Arabia, the largest Gulf economy, declined to cut rates.

Analysts said dollar and Treasury traders were rattled because the Saudi Arabia Monetary Authority nearly always moves in lockstep with the Fed on rate actions as the Gulf states are dependent on dollar revenues. The perceived defiance was taken as a sign that Saudi Arabia may be preparing to abandon the peg of its currency, the riyal, to the dollar.

"This is not something that I always follow, but it is something that the market watches and it is very much in the market today, " said Tom di Galoma, head of Treasurys trading at Jefferies & Co. "This is very early and this is a developing story, but the fear is that the Saudis will be selling their Treasurys."

Ashraf Laidi, chief foreign currency analyst at CMC Markets, said the Saudis did not mimic the U.S. rate cut because dollar weakness is fueling inflation in the Gulf and the country did not wish to stimulate the price pressure further. He said investor worries about the Saudis backing away from dollar-denominated assets were overblown.

A type of trading strategy known as a "curve steepener" has been in play since the rate cuts were announced Tuesday afternoon. This causes investors to put heavy selling pressure on the 30-year long bond and other longer-dated maturities and less pressure on shorter-term assets, such as the 2-year note.

These market plays are a signal that fixed-income market investors expect both higher inflation and further rate cuts.

There was limited reaction to new data reports. The Labor Department reported that jobless claims in the latest week fell by 9,000 to 311,000, a seven-week low.

Relatively benign weekly jobless claims figures are hard to mesh with recent news that the economy gave up 4,000 jobs in August. Some analysts believe that the discrepancy could be that many workers are undocumented and are afraid to apply for benefits when they lose their positions.

The Philadelphia Federal Reserve's latest survey showed a rebound in manufacturing this month. The headline figure jumped up to 10.9 after a flat reading in August.

Earlier Federal Reserve Chairman Ben Bernanke told Congress Thursday the credit crisis has created "significant market stress" and offered fresh assurances that regulators would take steps to curb fallout related to the mortgage crisis.