“Bonds were sold as economic data was better than expected,”

TO BE NOTED: From Bloomberg:

"Japan Bonds Complete Longest Loss Since 2006 on Recovery Signs

By Theresa Barraclough

May 30 (Bloomberg) -- Japanese bonds completed a third month of losses, the longest stretch since April 2006, on signs the recession in the world’s second-largest economy is easing.

Benchmark 10-year yields yesterday climbed toward the highest since November after a government report showed industrial production rose the most in 56 years as a rebound in exports helps the economy emerge from its worst recession since World War II. Japan’s so-called yield curve steepened this month, with the difference in yields between 2- and 10-year bonds expanding to the widest since May 2006.

“Bonds were sold as economic data was better than expected,” said Masaaki Tonami, manager of the global investment department at Sompo Japan Insurance Inc. in Tokyo.

The yield on the benchmark 10-year bonds rose 5.5 basis points, or 0.055 percentage point, to 1.485 percent this week in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The price fell 0.043 yen to 100.128 yen.

Twenty-year bonds posted a five-month drop, with yields adding 14 basis points to 2.155 percent in May.

Ten-year bond futures for June delivery fell 0.58 this month to 136.41 at the Tokyo Stock Exchange.

Japan’s industrial production rose 5.2 percent from March, the second monthly gain, the Trade Ministry said yesterday in Tokyo. The increase was faster than the 3.3 percent economists estimated, and companies said they planned to boost output in May and June as well.

Curve Tilts

“The strong production data promotes selling of bonds,” said Yasunari Ueno, chief market economist in Tokyo at Mizuho Securities Co., a unit of Japan’s second-largest lender.

Demand for debt also waned on concern investors will struggle to absorb increases in supply as the government seeks to fund stimulus spending. The Ministry of Finance last month said it will boost bond issuance by 15 percent to 130.2 trillion yen ($1.4 trillion) in the fiscal year started April.

The gap between 2- and 10-year yields expanded to 1.15 percentage points yesterday, according to data compiled by Bloomberg. The spread is likely to narrow to 0.99 percentage point by the end of June, a weighted Bloomberg survey of analysts showed.

A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

Return of Deflation

Holders of Japanese bonds incurred a loss of 0.2 percent since the end of April through May 28, according to indexes compiled by Merrill Lynch & Co. Japan’s stocks added 7.9 percent in the same period including reinvested dividends. The Nikkei 225 Stock Average rose 0.8 percent yesterday to 9,522.50.

Declines in bonds were limited on speculation the economy is on the brink of returning to deflation, easing concern higher prices will erode the value of the fixed payments of debt. Japan’s consumer prices excluding fresh food fell 0.1 percent in April, the second month of declines, the statistics bureau said in Tokyo yesterday.

“This is the beginning of the deflationary period in Japan,” said Takashi Nishimura, a Tokyo-based analyst at Mitsubishi UFJ Securities Co., a unit of Japan’s largest bank by assets. “This condition is favorable for the JGB market.”

Ten-year inflation-linked bonds yesterday yielded 2.21 percent more than similar-dated conventional debt, signaling investors expect the world’s second-largest economy to enter deflation. The securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Nomura Extension

Bond losses were also limited on speculation money managers such as Japan’s Government Pension Investment Fund, which oversees the world’s largest pool of retirement wealth, bought debt to match an index change by Nomura Securities Co.

“There is decent support around 1.5 percent, especially with month-end buying,” said Kazuhiko Sano, chief strategist at Nikko Citigroup Ltd. in Tokyo.

Nomura increased the average duration of its index by 0.14 year to 6.38 years into next month, according to the company’s Web site. Duration is a gauge of how much a change in yields affects the price of a bond portfolio.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net."

confirming the revival of risk taking and a general acknowledgement that economic life will continue

TO BE NOTED: From Alphaville:

"BarSlap! Posted by Paul Murphy on May 28 17:10.

Tim Bond, the Barclays Capital strategist, is having none of this bearish pessimism that has gripped markets since Bill Gross said the US could lose its triple A status and Marc Faber invoked the Z-word when discussing the prospects for American inflation.

From Bond’s latest Global Speculations - “Upside down bulls”:

In the financial markets, interpretation often counts for more than fact. Indeed, after passing through the qualitative and emotional analytical filter, factual inputs can often emerge from the process as anti-facts. At present, many market participants still appear to be afflicted by the mood of depressive pessimism that became pervasive last year. Under this condition, market developments and economic data-points that an impartial analysis would usually construe as positive are being warped into negative signals. Signs of an economic recovery, somehow, end up being interpreted as signs of impending economic doom.

Nowhere, Bond says, is this truer than with the prevailing fuss about the dollar and US treasury yields.

The fact that both asset classes have been losing their safe haven status is an unambiguously positive development, confirming the revival of risk taking and a general acknowledgement that economic life will continue.

Why, the BarCap man asks, if investors are fleeing the US because of its towering debt burden and the threat of hyperinflation, is sterling going up? Frying pans and fires springs to mind. Similarly, why has the Yen been depreciating against the dollar?

The current rumblings of discontent smack more of the avoidance of cognitive dissonance on the part of inveterate bears, than any dispassionate analysis of the situation.

Full takedown of the bears available here.

This entry was posted by Paul Murphy on Thursday, May 28th, 2009 at 17:10 and is filed under Capital markets. Tagged with barcap, green shoots, recovery, tim bond."

And Clusterstock:

"Analyst Says The Treasury Collapse Is Bullish Sign

Joe Weisenthal|May. 29, 2009, 6:41 AM|5

Print

Tags: Economy, Debt, U.S. Government, Tim Geithner, Interest Rates

You've seen the scary charts showing just how bad the Fed's policy of quantitative easing has failed. Although it would love to push long-term interest rates down to 4%, the market was having none of it. And the general consensus is that the uber-steep yield curve is a big nyet vote on both fiscal and monetary policy.

Tim Bond, an analyst at Barclays, says hogwash, taking the Geithner view that the rally in yields is the predictable response to both a recovering economy and the dissipation of the panic premium in US-denominated assets that built up during the bubble. The full report is embedded below (via FT Alphaville). Here's the introduction:

In the financial markets, interpretation often counts for more than fact. Indeed, after
passing through the qualitative and emotional analytical filter, factual inputs can often
emerge from the process as anti-facts. At present, many market participants still
appear to be afflicted by the mood of depressive pessimism that became pervasive last
year. Under this condition, market developments and economic data-points that an
impartial analysis would usually construe as positive are being warped into negative
signals. Signs of an economic recovery, somehow, end up being interpreted as signs of
impending economic doom.

Nowhere is this truer than of the prevailing fuss about the dollar and US treasury yields.
Both asset classes have been losing the save haven and liquidity premiums established
during the market carnage of last year. This is an unambiguously positive development,
confirming a revival in risk appetites, decreased fears about the financial system and a
general improvement in economic expectations. However, after passing through the
prevailing interpretative filter, these positives become negatives. Rather than indicating
an economic recovery, the lower dollar and higher bond yields apparently reflect a crisis
of confidence in US Inc, investors fleeing the prospect of endless budget deficits, a
towering government debt burden and prospective hyperinflation.

Never mind the rather obvious objection that the violent rally in Cable specifically
contradicts this theory – unless of course one assume s that jumping out of the frying
pan into the fire is a rational approach to securing a safe haven. Equally, never mind the
other rather obvious point that the currency of the largest creditor nation – Japan – has
recently been depreciating against the dollar, a development that is not exactly
indicative of rising concerns about US borrowing. Rather, if one starts from the premise
that nothing good is happening in the global economy, any contrary empirical
indications must inevitably be re-interpreted to fit the premise. The current rumblings
of discontent smack more of the avoidance of cognitive dissonance on the part of
inveterate bears, than any dispassionate analysis of the situation.

Bond Sell Off

Publish at Scribd or explore others:"

Me:

Don the libertarian Democrat (URL) said:

May. 29, 10:20 AM

I agree with him, as does Richard Fisher:

"Meanwhile, Reuters reported, "Federal Reserve Bank of Dallas President Richard Fisher said on Thursday it was not clear if the U.S. Treasury yield curve was steepening because of concerns over supply or a more optimistic economic outlook. "Obviously, there is a lot of supply of debt. Another way to interpret the steepening of the yield curve is ... confidence in economy going forward," he told reporters after a speech, adding that both could be happening at the same time. "I think it is probably a little bit of both, discounting the supply of new debt, but I detect...there is a pick up in confidence about the future," said Fisher."

In my book, this is how QE is supposed to work,ie, low short term interests rates and rising longer term interest rates. It's working. Now, of course, at some point, higher interest rates will become a problem, but we're a bit away from that now. So, the negative comments are reasonable, and might turn out to be right. We might, possibly, lose control down the road. I simply disagree.

By the way, haven't we all learned that we're all highly fallible in predicting the future yet?

And:

Don the libertarian Democrat May 29 15:24

I agree with him and Richard Fisher:

"Meanwhile, Reuters reported, "Federal Reserve Bank of Dallas President Richard Fisher said on Thursday it was not clear if the U.S. Treasury yield curve was steepening because of concerns over supply or a more optimistic economic outlook. "Obviously, there is a lot of supply of debt. Another way to interpret the steepening of the yield curve is ... confidence in economy going forward," he told reporters after a speech, adding that both could be happening at the same time. "I think it is probably a little bit of both, discounting the supply of new debt, but I detect...there is a pick up in confidence about the future," said Fisher."

I just want to be on record as an idiot.

Don the libertarian Democrat (URL) said:

May. 29, 10:31 AM

Joe,

Thanks a million for making that report available.

Cheers,

Don

Instead, the yield curve has become more steeply sloped, as longerterm Treasury yields have risen while short-term rates have declined.

TO BE NOTED:

• May 20, 2009, 1:53 PM ET

St. Louis Fed Paper Rebuts Bernanke’s Treasury-Purchase Views

Is Ben Bernanke wrong about the potential effects of the Federal Reserve’s purchases of longer-term Treasurys on yields?

A paper released this week by the St. Louis Fed suggests he might be. Bernanke “seems to suggest that the purchase of a large quantity of longer-term government securities might reduce longer-term rates,” St. Louis Fed economist Daniel Thornton wrote in a research note posted on the St. Louis Fed’s Web site.

And with short-term rates near zero, the yield curve would presumably flatten under that hypothesis, Thornton observed.

That, however, is “inconsistent” with the “commonly held view” that long-term rates are influenced by what’s known as the expectations hypothesis, Thornton wrote.

“Under the expectations hypothesis, long-term rates are equal to the market’s expectation of the short-term rate over the term of the long-term asset plus a risk premium,” Thornton wrote. Therefore, the Fed “cannot permanently affect the shape of the yield curve by purchasing securities in one end of the market,” he wrote.

In March, the Fed announced that it would buy up to $300 billion in longer-term Treasury securities in addition to more than $1 trillion in agency and agency-backed mortgage backed securities.

The announcement, on March 18, led to a stunning rally in Treasurys and flattening of the yield curve that appeared to support Bernanke’s statement in December 2008 that buying longer-term Treasurys or agencies in large quantities “might influence the yields on these securities, thus helping to spur aggregate demand.”

But the yield-curve flattening, Thornton noted, “has vanished” since March. So while the Fed has boosted longer-term Treasury purchases and expanded its balance sheet, “these actions appear to have had no permanent effect on the yield curve,” he wrote."

Economic SYNOPSES
short essays and reports on the economic issues of the day
2009 􀀀 Number 25
After its March 18 meeting, the Federal Open Market
Committee (FOMC) stated that it had decided to
purchase “up to $300 billion of longer-term Treasury
securities over the next six months.” This decision follows
a speech by Chairman Bernanke on December 1, 2008, indicating
that “the Fed could purchase longer-term Treasury
or agency securities on the open market in substantial quantities.
This approach might influence the yields on these
securities, thus helping to spur aggregate demand.”1
It is commonly believed that the FOMC affects longerterm
rates by setting a target for the overnight federal funds
rate. It is also commonly believed that longer-term rates are
determined by the market’s expectation for short-term rates,
in accordance with the expectations hypothesis of the term
structure of interest rates. Under the expectations hypothesis,
long-term rates are equal to the market’s expectation of the
short-term rate over the term of the long-term asset plus a
risk premium. Hence, if the FOMC reduces its target for
the funds rate and the market expects the FOMC to keep
the target low, long-term rates should decline accordingly.
With the funds rate target near zero, it is essentially impossible
for the FOMC to reduce long-term rates by reducing
its funds rate target further.
Chairman Bernanke seems to suggest that the purchase
of a large quantity of longer-term government securities
might reduce longer-term rates. With short-term rates
already near zero, this would cause the yield curve to flatten,
as long-term rates decline relative to short-term rates. How -
ever, the idea that the Fed can influence long-term interest
rates by intervening directly in the longer end of the market
is inconsistent with the commonly held view—that is, the
expectations hypothesis. This hypothesis assumes that there
is a very high degree of substitutability (essentially perfect)
among Treasuries of various maturities. Under perfect
substitutability, the reduction in long-term rates (with
unchanged risk premiums) would cause investors to sell
the lower-yielding short-term assets and purchase the now
higher-yielding long-term assets.( NB DON ) This arbitrage activity
could cause longer-term rates to rise and short-term rates
to fall. This process would continue until the yield curve
returned to its previous structure. The only possible effect
of the increased purchase of long-term securities would be
on the position of the yield curve: It could shift down if the
purchase of long-term Treasuries sufficiently increased the
supply of credit relative to demand. Under the expectations
hypothesis, the slope of the yield curve is determined by
risk premiums that should not be affected by simply purchasing
assets at one end of the term structure relative to
the other.
Either the Fed affects long-term rates because of the
expectations hypothesis, which means that it cannot permanently
affect the shape of the yield curve by purchasing
securities in one end of the market, or the short and long
ends of the market are sufficiently segmented so that the
Fed can permanently affect the slope of the yield curve by
intervening in one end of the term structure relative to the
other. However, in the latter case, the Fed’s ability to influence
long-term rates by controlling the short-term rate is
attenuated by the zero lower bound.
The observed effect of the FOMC’s decision to purchase
longer-term government securities on the term structure
is consistent with the belief that there is a high degree of
substitutability of assets across the term structure. An
announcement effect occurred when the FOMC made
known its intention to purchase up to $300 billion in longerterm
government securities: Longer-term Treasury yields
immediately declined by about 50 basis points. In contrast,
shorter-term rates were unaffected by the announcement.
The announcement effect resulted in a significant flattening
The Effect of the Fed’s Purchase of
Long-Term Treasuries on the Yield Curve
Daniel L. Thornton, Vice President and Economic Adviser
Chairman Bernanke seems to suggest
that the purchase of a large quantity of
longer-term government securities
might reduce longer-term rates.
of the yield curve. Figure 1 shows the
coupon yield curve the day before and
the day of the announcement: There was
very little effect on rates for Treasuries
with maturities of less than a year, but
the announcement effect gets progressively
larger as the term to maturity
lengthens—until about 5 years. (For
maturities of 5 years or longer the
effect is about 50 basis points.) A similar
announcement effect is reflected in the
wide range of longer-term corporate
bond yields.
The FOMC made good on its
announcement and the Fed increased
its holdings of longer-term Treasury
securities by about $59 billion between
March 19 and April 29, 2009. During
this period Treasury yields responded
to Fed actions as well as other changes
in the economic and financial environment.
Figure 2 compares the yield curves
on March 17 and April 29. The marked
flattening of the yield curve associated
with the FOMC’s announcement has
vanished. Instead, the yield curve has
become more steeply sloped, as longerterm
Treasury yields have risen while
short-term rates have declined.
There have been many events that
markets have responded to since
March 18. Hence, it is difficult if not
impossible to attribute the steepening
of the yield curve to a particular factor.
The Fed has increased its purchases of
longer-term Treasuries and expanded its balance sheet by
about $150 billion since March 18. Whatever their immediate
effect, these actions appear to have had no permanent
effect on the yield curve. 􀀀
1 Bernanke, Ben S. “Federal Reserve Policies in the Financial Crisis.” Speech at
the Greater Austin Chamber of Commerce, Austin, Texas, December 1, 2008.
Economic SYNOPSES Federal Reserve Bank of St. Louis 2
research.stlouisfed.org
Posted on May 18, 2009
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

and a return to easy money has marked the end of every recession

TO BE NOTED: From Calafia Beach Pundit:

Fed + yield curve = end of recession

Mark Perry had a nice post yesterday with an update of the Fed's model for predicting recessions and recoveries. The upward slope of the Treasury yield curve now says that the probability of recession this year is rapidly approaching zero: "the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year."

This prompted me to update my own model, which also uses the slope of the yield curve, but which adds in the real Fed funds rate, since the latter is a good measure of just how tight or loose the Fed actually is. As this chart shows, the yield curve is always negatively sloped going into recessions and positively sloped coming out of recessions. That's because every recession in modern times has been preceded by a significant tightening of monetary policy, and a return to easy money has marked the end of every recession. So today it is clear that we have the essential monetary ingredients for a recovery. Indeed, given the rise in commodity prices and other signs of improvement that I've been noting for awhile, it seems pretty likely that the economy will be on the mend before mid-year, as I predicted at the end of last year.

Of course, when recessions end it is never immediately obvious, and it typically takes many months or even a year or more before the numbers confirm that the recession has ended. I recall how Bush Sr. lost his reelection bid in 1992 in part because of the widespread belief that the economy was hopelessly mired in recession; by the end of 1993, however, revised numbers came out which showed that the economy had actually enjoyed a decent recovery in 1992. Similarly, during the summer and fall of 2003 the mantra was that we were in a "jobless recovery," monetary policy was "pushing on a string," and deflation threatened the global economy. We later learned that the economy took off like a rocket starting in July of that year.

Posted by Scott Grannis "