Jones Lang LaSalle
Interest Rate Commentary
Wednesday: 01/11/06 5:00 PM EST : No economic guidance, a poor note auction, and more gains in the stock market bore on Treasuries today. In late trading, the 10-Year Treasury Note was down by 7/32, raising its yield to 4.45%; the Dow was up by 31.86 points to 11,043.44; and the Nasdaq was up by 11.04 points to 2,331.36.
Treasuries had been soggy in morning trade ahead of the 5-Year Note auction and the market remained weighted down as the new issue drew weak demand. Bids exceeded the offer amount by 2.10 to 1, the lowest bid-to-cover ratio for that maturity since last April. Noncompetitive bids, a gauge of individual investor demand, totaled $90 million, matching the figure in last month's auction but below the $104 million average of the twelve auction's preceding today's. And foreign demand was soft. Indirect competitive bids, which include those from foreign central banks, garnered 28.5% of all accepted competitive bids and 28.3% of the entire issue. This was down from 44.0% and 43.7% in last month's auction. The average award portion to indirect competitive bidders in the twelve offerings preceding today's was 37.7%.
The market did not even find support from New York Fed President Timothy Geithner, who in an address to economists today remarked that core inflation is "quite moderate." The Fed has recently signaled that its rate-tightening campaign is winding down, a development that has helped fuel gains in both the bond and stock market. The next monetary policy meeting is scheduled for the end of the month.
The rate outlook has particularly favored stocks and the optimistic sentiment helped push the major indices to new, multi-year highs today. In corporate news, negative guidance from DuPont was offset by word that Apple Computer will be using Intel chips, a move that pushed the computer maker's stock to a record high today.
And although oil prices rose again due to ongoing concerns regarding Iran's renewed nuclear research, traders got some good supply news today. In its oil inventory report, the Energy Department said that supplies of distillates, which include diesel and heating fuel, rose last week by 4.9 million barrels (one barrel equals 42 gallons) and were 6.6% higher on a year-over-year basis. Gasoline inventories rose by 4.5 million barrels, though they were 4.1% lower than a year earlier. This was, however, an improvement from the 6.0% Y/Y deficit posted the week before.
Not all of the news was good. Inventories of crude oil fell by 2.9 million barrels. Despite the downdraw, levels were 11.4% higher than a year earlier. On the New York Mercantile Exchange, a barrel of light, sweet crude oil for next month delivery rose by $0.57 to settle at $63.94.
By the end of stock trading, the Dow had risen on the day by 0.29%, the S&P 500 by 0.35%, and the Nasdaq by 0.48%. The Dow's close was the highest since June 7, 2001, the S&P 500's since May 22, 2001, and the Nasdaq's since February 16, 2001.
Tomorrow brings a heavy slate of economic releases. The weekly jobless claims report will again spotlight the labor situation. Last Thursday's report showed that the level of initial claims fell in the previous week by a larger than expected 35,000 to 219,000, the lowest level in over five years. But the data may have been distorted by seasonal factors and observers are waiting to see how the data develops over the next few weeks. A sizeable upward move in last week's claims figure is anticipated in tomorrow's report but the closure of state labor offices in Monday of last week once again necessitates the application of an adjustment factor which could produce an unexpected result.
Inflation will be the issue raised by the report on import and export prices for December. In November, import prices plummeted by 1.7%, the biggest monthly drop in over two-and-a-half years. The move was chiefly due to a huge, 8.0% drop in the price of petroleum imports, but even excluding that category, prices were down by 0.2%. Oil prices (average spot Brent) moved up last month for the first time since August so analysts are looking for an overall import price increase of up to 0.6%. Apart from the headline number, traders will be watching the ex-oil category for signs of inflation stemming from the trade situation.
And international trade is the focus of another of tomorrow's releases. The balance of trade report for October surprised observers by revealing a record deficit (value of imports in excess of exports) for the month of $68.9 billion, up from September's previous record of $66.0 billion. Analysts had predicted a decline because of lower oil prices that month. But the report indicated that the value of imports rose by 2.7% to a new record high $176.4 billion. Exports rose by 1.7% to $107.5 billion, 0.7% below August's record high of $108.3 billion.
Once again, because of a further decline in oil prices in November, forecasters are looking for a narrower gap. Current estimations call for a deficit reading of about $66.0 billion. The improvement would be a negative for bonds since the higher the deficit, the more it subtracts from gross domestic product. However, a larger than expected narrowing might lend support to the dollar which, in turn, would make dollar-denominated investments such as Treasuries more attractive.
Tomorrow afternoon, the Treasury will be auctioning a new issue of 10-Year Treasury Inflation Protected Securities (TIPS). TIPS differ from conventional Treasuries in that their face value is regularly adjusted according to changes in the Consumer Price Index. Because of this the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted principal or the original face value is paid out.
The Treasury has been auctioning new 10-Year TIPS twice a year with reopenings (sales of additional amounts of the initial issues) in intervening quarters. In the last initial issue (July), general demand was tepid with a bid-to-cover ratio of 1.68 versus 1.88 in the preceding initial offering (February) and noncompetitive bids totaled $71 million versus $166 million in February. But foreign demand was solid with indirect competitive bids taking 43.2% of the issue versus 35.9% in February.
The Treasury will also be releasing December's budget figures tomorrow afternoon. In December of 2004, government outlays exceeded receipts by $2.9 billion. Analysts estimate that last month's figures will result in a deficit of about the same size. This would translate into a total deficit for the 2006 fiscal year to date (begun last October) of $133.2 billion, a larger shortfall than the $118.1 billion posted for the same period on the 2005 fiscal year. Large budget deficits are a negative for the bond market because it means the government will have to issue more Treasuries in order to fund its operations. Additional Treasuries dilute the value of those already in the market.
10:30 AM EST : Treasuries showed a little bounce in early trading following stiff losses yesterday but prices are currently hovering at unchanged levels as stocks have shaken off opening losses and are now holding slight gains. There are no major economic releases scheduled for today but positioning for today's Treasury auction of 5-Year Notes is keeping a damper on the bond market.
Though the market has already adjusted somewhat to today's note auction, a number of traders will continue to make room for the new issue by selling the old, bidders will refrain from buying the old issue in order to keep the yield level up (bids are for yield), and other market participants will wait to see how successful the auction is before deciding whether to buy or not. Many traders are wary of how well the new supply will received, in particular, how much foreign demand there will be. Foreign demand has been a key support for the market and there is concern that it may eventually wane. The fact that this week's note offerings will be the first of the new year adds some psychological weight.
Last month's auction produced mixed results. Bids exceeded the offer amount by 2.38 to 1, a weaker bid-to-cover ratio than November's 2.61. Noncompetitive bids, a gauge of individual investor demand, totaled $90 million, down from $183 million in November. But foreign demand was strong. Indirect competitive bids, which include those from foreign central banks, took 43.7% of the entire issue, a much larger portion than the 20.7% they were awarded in November.
Today's note offering will have a face value of $13 billion. The bidding deadline is 1:00 PM Eastern Time. The success of the auction will color trade in the afternoon. But the upcoming economic data and tomorrow's auction of $9 billion in new, 10-Year Treasury Inflation Protected Securities (TIPS) will cap possible upside movement.
Interest Rate Commentary
Wednesday: 01/11/06 5:00 PM EST : No economic guidance, a poor note auction, and more gains in the stock market bore on Treasuries today. In late trading, the 10-Year Treasury Note was down by 7/32, raising its yield to 4.45%; the Dow was up by 31.86 points to 11,043.44; and the Nasdaq was up by 11.04 points to 2,331.36.
Treasuries had been soggy in morning trade ahead of the 5-Year Note auction and the market remained weighted down as the new issue drew weak demand. Bids exceeded the offer amount by 2.10 to 1, the lowest bid-to-cover ratio for that maturity since last April. Noncompetitive bids, a gauge of individual investor demand, totaled $90 million, matching the figure in last month's auction but below the $104 million average of the twelve auction's preceding today's. And foreign demand was soft. Indirect competitive bids, which include those from foreign central banks, garnered 28.5% of all accepted competitive bids and 28.3% of the entire issue. This was down from 44.0% and 43.7% in last month's auction. The average award portion to indirect competitive bidders in the twelve offerings preceding today's was 37.7%.
The market did not even find support from New York Fed President Timothy Geithner, who in an address to economists today remarked that core inflation is "quite moderate." The Fed has recently signaled that its rate-tightening campaign is winding down, a development that has helped fuel gains in both the bond and stock market. The next monetary policy meeting is scheduled for the end of the month.
The rate outlook has particularly favored stocks and the optimistic sentiment helped push the major indices to new, multi-year highs today. In corporate news, negative guidance from DuPont was offset by word that Apple Computer will be using Intel chips, a move that pushed the computer maker's stock to a record high today.
And although oil prices rose again due to ongoing concerns regarding Iran's renewed nuclear research, traders got some good supply news today. In its oil inventory report, the Energy Department said that supplies of distillates, which include diesel and heating fuel, rose last week by 4.9 million barrels (one barrel equals 42 gallons) and were 6.6% higher on a year-over-year basis. Gasoline inventories rose by 4.5 million barrels, though they were 4.1% lower than a year earlier. This was, however, an improvement from the 6.0% Y/Y deficit posted the week before.
Not all of the news was good. Inventories of crude oil fell by 2.9 million barrels. Despite the downdraw, levels were 11.4% higher than a year earlier. On the New York Mercantile Exchange, a barrel of light, sweet crude oil for next month delivery rose by $0.57 to settle at $63.94.
By the end of stock trading, the Dow had risen on the day by 0.29%, the S&P 500 by 0.35%, and the Nasdaq by 0.48%. The Dow's close was the highest since June 7, 2001, the S&P 500's since May 22, 2001, and the Nasdaq's since February 16, 2001.
Tomorrow brings a heavy slate of economic releases. The weekly jobless claims report will again spotlight the labor situation. Last Thursday's report showed that the level of initial claims fell in the previous week by a larger than expected 35,000 to 219,000, the lowest level in over five years. But the data may have been distorted by seasonal factors and observers are waiting to see how the data develops over the next few weeks. A sizeable upward move in last week's claims figure is anticipated in tomorrow's report but the closure of state labor offices in Monday of last week once again necessitates the application of an adjustment factor which could produce an unexpected result.
Inflation will be the issue raised by the report on import and export prices for December. In November, import prices plummeted by 1.7%, the biggest monthly drop in over two-and-a-half years. The move was chiefly due to a huge, 8.0% drop in the price of petroleum imports, but even excluding that category, prices were down by 0.2%. Oil prices (average spot Brent) moved up last month for the first time since August so analysts are looking for an overall import price increase of up to 0.6%. Apart from the headline number, traders will be watching the ex-oil category for signs of inflation stemming from the trade situation.
And international trade is the focus of another of tomorrow's releases. The balance of trade report for October surprised observers by revealing a record deficit (value of imports in excess of exports) for the month of $68.9 billion, up from September's previous record of $66.0 billion. Analysts had predicted a decline because of lower oil prices that month. But the report indicated that the value of imports rose by 2.7% to a new record high $176.4 billion. Exports rose by 1.7% to $107.5 billion, 0.7% below August's record high of $108.3 billion.
Once again, because of a further decline in oil prices in November, forecasters are looking for a narrower gap. Current estimations call for a deficit reading of about $66.0 billion. The improvement would be a negative for bonds since the higher the deficit, the more it subtracts from gross domestic product. However, a larger than expected narrowing might lend support to the dollar which, in turn, would make dollar-denominated investments such as Treasuries more attractive.
Tomorrow afternoon, the Treasury will be auctioning a new issue of 10-Year Treasury Inflation Protected Securities (TIPS). TIPS differ from conventional Treasuries in that their face value is regularly adjusted according to changes in the Consumer Price Index. Because of this the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted principal or the original face value is paid out.
The Treasury has been auctioning new 10-Year TIPS twice a year with reopenings (sales of additional amounts of the initial issues) in intervening quarters. In the last initial issue (July), general demand was tepid with a bid-to-cover ratio of 1.68 versus 1.88 in the preceding initial offering (February) and noncompetitive bids totaled $71 million versus $166 million in February. But foreign demand was solid with indirect competitive bids taking 43.2% of the issue versus 35.9% in February.
The Treasury will also be releasing December's budget figures tomorrow afternoon. In December of 2004, government outlays exceeded receipts by $2.9 billion. Analysts estimate that last month's figures will result in a deficit of about the same size. This would translate into a total deficit for the 2006 fiscal year to date (begun last October) of $133.2 billion, a larger shortfall than the $118.1 billion posted for the same period on the 2005 fiscal year. Large budget deficits are a negative for the bond market because it means the government will have to issue more Treasuries in order to fund its operations. Additional Treasuries dilute the value of those already in the market.
10:30 AM EST : Treasuries showed a little bounce in early trading following stiff losses yesterday but prices are currently hovering at unchanged levels as stocks have shaken off opening losses and are now holding slight gains. There are no major economic releases scheduled for today but positioning for today's Treasury auction of 5-Year Notes is keeping a damper on the bond market.
Though the market has already adjusted somewhat to today's note auction, a number of traders will continue to make room for the new issue by selling the old, bidders will refrain from buying the old issue in order to keep the yield level up (bids are for yield), and other market participants will wait to see how successful the auction is before deciding whether to buy or not. Many traders are wary of how well the new supply will received, in particular, how much foreign demand there will be. Foreign demand has been a key support for the market and there is concern that it may eventually wane. The fact that this week's note offerings will be the first of the new year adds some psychological weight.
Last month's auction produced mixed results. Bids exceeded the offer amount by 2.38 to 1, a weaker bid-to-cover ratio than November's 2.61. Noncompetitive bids, a gauge of individual investor demand, totaled $90 million, down from $183 million in November. But foreign demand was strong. Indirect competitive bids, which include those from foreign central banks, took 43.7% of the entire issue, a much larger portion than the 20.7% they were awarded in November.
Today's note offering will have a face value of $13 billion. The bidding deadline is 1:00 PM Eastern Time. The success of the auction will color trade in the afternoon. But the upcoming economic data and tomorrow's auction of $9 billion in new, 10-Year Treasury Inflation Protected Securities (TIPS) will cap possible upside movement.
posted by Jones Lang LaSalle NJ News Blog at 10:14 AM
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