Bonds 01 (May 08 - Aug 10)

[millionairemind]

Published June 30, 2009

Worst over for US Treasuries, say dealers
Benchmark 10-year note yield seen finishing year little changed at 3.58%

(NEW YORK) Wall Street's largest bond-trading firms say that the worst may be over for investors in Treasuries after government securities posted their biggest first-half losses in at least three decades.

The 16 primary dealers, which trade directly with the Federal Reserve and are obligated to bid at Treasury auctions, forecast that the benchmark 10-year note yield will finish the year little changed at 3.58 per cent, after rising from 2.21 per cent at the end of 2008, according to a survey by Bloomberg News.

The dealers, which include JPMorgan Chase & Co and Goldman Sachs Group Inc, said that the sell-off will slow after signs emerged this month that foreign buyers are scooping up record amounts of debt being sold by the Obama administration. Plus, yields at the highest since November are luring investors speculating that the economy's recovery may be slow.

'We have seen an incredible amount of demand,' said Richard Tang, head of fixed-income sales at primary dealer RBS Securities Inc in Stamford, Connecticut. 'A lot of it is asset reallocation, out of risk assets and commodities. It's been significant.'

The firms have been accurate so far this year. A survey in January showed that they predicted that Treasuries would fall as efforts to spur the economy gain traction and the flight to safety that drove the best returns in government debt since 1995 waned. Ten-year notes would lose 3.5 per cent, based on the median forecast of yields in January.

The value of US government debt has actually declined 4.41 per cent since December, and is on a pace to post a loss for only the third time since Merrill Lynch & Co started calculating returns with its US Treasury Master index in 1978. The index rose 14 per cent last year as the global economy lapsed into the worst recession in six decades.

If yields stayed constant for the remainder of the year, investors would still realise a loss for 2009 even after collecting interest payments.

Bonds rallied last week as indirect bidders, a class of investors that includes foreign central banks, purchased 67.2 per cent of the record US$27 billion in seven-year notes sold on June 25, or double the amount of bids than at the last sale in May.

The ratio was also the highest since 2004 on the sale of a US$37 billion in five-year notes the day before, while the US$40 billion in two-year notes auctioned on June 23 attracted the most indirect bids in at least six years.

'There was fear about central bank selling,' said Jeffry Feigenwinter, head of Treasury trading in New York at primary dealer BNP Paribas Securities. 'When they showed up at these auctions, some of those fears were put to rest.'

The surge in demand cannot be ignored even with a change in a rule that went into effect this month that may have raised the levels of indirect bids by eliminating a provision allowing some customer awards to be classified as dealer bids, said William O'Donnell, head of Treasury strategy at RBS.

The Fed's holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by US$257.2 billion this year, or 15 per cent, according to data compiled by Bloomberg. That compares with an increase of US$127.3 billion, or 10 per cent, in the first half of 2008.

The US relies on foreign investors to finance the federal budget deficit. About 51 per cent of the US$6.45 trillion in marketable Treasuries are held outside the US, up from 35 per cent in 2000, according to data compiled by the government.

Concern that international investors would pull back from American financial assets have grown as the US Dollar Index weakened 9.4 per cent since February after President Barack Obama and Fed chairman Ben Bernanke committed US$12.8 trillion to thaw frozen credit markets and snap the longest US economic slump since the 1930s.

New York-based Goldman Sachs, another primary dealer, estimated that the US may borrow a record US$3.25 trillion this fiscal year ending Sept 30, almost four times the US$892 billion in 2008, to finance the budget deficit.

'The debt is expected to explode, as we all know,' said John Spinello, chief technical strategist in New York at primary dealer Jefferies Group Inc. 'Will they maintain that 50 per cent share? We don't know.'

People's Bank of China governor Zhou Xiaochuan said that the nation will not change its currency reserve policy suddenly, speaking to reporters at a central bankers' meeting on Sunday in Basel, Switzerland.

The US dollar fell against most of its major counterparts on June 26 after China repeated its call for a supranational currency 'delinked' from sovereign nations. The People's Bank of China said that the International Monetary Fund should manage more of members' foreign exchange reserves.

'To prevent the deficiencies in the main reserve currency, there's a need to create a new currency that's delinked from the economies of the issuers,' the People's Bank said in its 2008 review. China is the biggest foreign holder of Treasuries, with US$763.5 billion as at April. -- Bloomberg

[winston]

Junk Bonds Default Rate Could Hit 25 Percent By: Dan Weil

The economy's fragile condition means the junk bond default rate could reach 25 percent, says Shawn Matthews, CEO of Cantor Fitzgerald, one of the country's biggest bond dealers.

"The default rate really is a reflection of the past, as capital has been starved out of the system and people are trying to build their businesses," he told Bloomberg TV.

"They're going to need to figure out new ways to attract capital into the area. The default rate could go to 20 percent or 25 percent by the time it's over, because the world is still a bad place," Matthews said.

According to Matthews, the recent gains in distressed debt represents "a liquidity rally."

"Money is searching for an interesting place or went out on the credit curve. It's kind of what the G-7 and central banks are pushing for," he said.

And what was that?

"They wanted people to get more risky assets on their books, and that's happened," Matthews said.

"But we still have an economy where the underpinnings aren't so great. People are looking for green shoots to appear. They have, but we've thrown trillions of dollars to get those green shoots."

That means "it's going to be an up and down economy for the next several years," he said.

Many experts are cautious about acquiring distressed debt now. "We're not confident about buying high-yield bonds until the outlook for the economy is set to improve," said Michael Sheldon, chief market strategist for RDM Financial Group.

© 2009 Newsmax.

http://moneynews.newsmax.com/streettalk ... 30381.html

[kennynah]

GM's bonds were as good as being defaulted liao loh...

[winston]

Dreman: Terrified of Bonds, Stick to Stocks By: Ellen Chang

David Dreman, the contrarian investor, says he's avoiding bonds and sticking with stocks and real estate because he is "terrified" of bonds, Reuters reported.

"I think we're going to have some of the worst inflation, with all the printing presses around the world running 24/7, Dreman said.

"Probably the two worst investments over the past two, three years have been stocks and real estate. They could be the best investments two or three years out.

Dreman recommended purchasing stocks, but said he will not invest in U.S. Treasuries, corporate bonds or TIPS (Treasury Inflation-Protected Securities).

"I'm terrified of bonds," said Dreman, the chief investment officer at Dreman Value Management. "People are starting to worry about inflation.

Although he predicted the recession is almost over, the banking issues wont disappear soon, he said.

"I think we came off a bottom, but it's probably going to take a couple of years before we get out of this, or have the banking problem solved," Dreman said. "That's still what we're working through and what's being done."

Alan Greenspan, the former Federal Reserve Board chairman, said in a Financial Times editorial that he is a fan of buying stocks.

"I recognize that I accord a much larger economic role to equity prices than is the conventional wisdom," he said.

"From my perspective, they are not merely an important leading indicator of global business activity, but a major contributor to that activity, operating primarily through balance sheets. My hypothesis will be tested in the year ahead. If shares fall back to their early spring lows or worse, I would expect the green shoots spotted in recent weeks to wither."

© 2009 Newsmax.

http://moneynews.newsmax.com/streettalk ... 30867.html

[-dol-]

I am especially terrified of US$-denominated bonds issued by the US of A - and not because of inflation.

Anyone thinks deflation might be the problem, instead of inflation?

Even with deflation, I will still be terrified of those bonds.

[kennynah]

my unqualified opinion...deflation is unlikely... not with all these multi trillion stimulus package at work...

inflation... well... my opinion is that unless crude oil spikes way past $100pbl again...this would not be much of an issue either...

thus...i see the US economy staying in a rather prolonged period of slow growth... how long... i ask my pet whale and confirm with my fengshui guru...later then i post again...

[-dol-]

Dear kenny,

Your acquarium must be quite big, not to mention your palace

Actually, I am hoping for deflation because I cannot afford the sky-high prices of everything these days. And I think the majority of the people in this world would be better off for it.

[LenaHuat]

Dear K

Sean Connery - Seriously speaking I have never seen any of his JB movies. But I know what U mean by the Scottish accent, I'm sure U mean his accent bears resemblance to the matronly singing sensation on "Britain's got talent" My first JB idol was Roger Moore and then my fancy turned to Timothy Dalton.

Oh, dear....afraid U've got to wait long long for major downswing. I've been positive abt the stock markets since I posted this in the thread "Averaging Up on Winning positions" on 24 March 2009. But I recall a week or so b4 this date I hve already posted something optimistic.

http://wookup.com/finance/forum/viewtopic.php?f=16&t=1344&p=46730&hilit=rally+legs#p46730

But Nourini could be right about a possibility of a serious dip in the US economy next year. This is when the govt stimulus progs run their courses and the private sector failed to pick up steam.

I traced back the one last time I had used the word "optimistic" in this forum and that was May 29.
How shall I frame the outlook for the next 3-4 months? I think it will be as bright and cheery as ION, that iconic magnetic mall at Orchard Road. It's in the nature of the equities market that there would be summer rain, showers or wintry thunderstorms. But what we had experienced since Sep 2007 to mid-March 2009 was a once-in-a-100-years flood-planning aberration. We have left that framework.

Economic indicators in many countries have turned positive. Global trade is picking up.
Earlier on, I had expected the DOW to hit 9,000 by year-end. But it's gotten there in July.
I think it has steam to end Dec 2009 higher.

[kennynah]

L : congratulations on your accurate outlook and I hope you have been handsomely rewarded as a result....

[winston]

The one thing Porter Stansberry would teach every investor
By Porter Stansberry in the S&A Digest:

Given the chance to make 30% in stocks or 25% in bonds (from the March lows), you ought to pick the bonds. Why? Two reasons.

First, as a bondholder, you have a legal claim to the par ($100) value of the bond. You have no such claim when you buy a stock.

Second, you should remember performing bonds will continue to pay their full coupon, regardless of the price you paid. So if you buy a bond for $50 that yields 7% at par, you're going to earn an annual yield of 14%. When you start adding up both the yields you can earn simply holding a bond and the capital gain you can make when it's redeemed, you can see right away that buying bonds at a steep discount is usually a much better investment than buying stocks.

If there's one thing I would teach every single subscriber, it's to always evaluate a company's bonds before you buy its stock. If you can earn 15%-25% in the bonds - and you frequently can on yield alone - why bother owning the stock? You're going to make just as much money in the bonds as you will in the stock - with much, much less risk.