CFDTrading
Junior member
- Messages
- 49
- Likes
- 1
A Full-Blown Market Panic Is Sending Traders To Treasuries
Treasury yields were hammered this past week. What was initially a general concern surrounding the health of the US and global financial markets has clearly turned into a full-blown crisis this week. The weekend raised the stakes quickly with the quick decline in Lehman Brothers.
US Treasuries
• Treasury Bill Yields Plunge to 1954 Low
• Are The Fed’s Rescues Putting The US Treasury In A Vulnerable Position?
A Full-Blown Market Panic Is Sending Traders To Treasuries
US 10-Year Treasury Note 3.756 -21bps
Treasury yields were hammered this past week. What was initially a general concern surrounding the health of the US and global financial markets has clearly turned into a full-blown crisis this week. The weekend raised the stakes quickly with the quick decline in Lehman Brothers. Without a viable buyer and no help from the Fed and Treasury Department, the venerable securities firm was forced into bankruptcy – the largest failure in history. This clearly bodes ill for the health of the markets (as the sale of their glut of inventory will constrict already tight liquidity), weighs on the outlook for employment and economic trends, and it also suggests the government won’t be the safety net that many investors had hoped for. When the Fed moved in to bail out the AIG with an $85 billion loan (at a steep price for the firm), the reaction was even worse than the failure of Lehman. Not only has the US Treasury taken huge sums of debt it may have to potentially hold for some two years; but they have implicitly signaled that conditions are so bad in the markets, that they have to pick and choose who is saved. AIG was certainly threatening a much more violent backlash than a mere securities firm going under.
Over the coming week, a few fundamentals will hit the wires; but the market will be solely focused on the health of the credit and financials. In the short-term traders will be looking for additional failures. We have seen a number of firms perhaps narrowly avoiding the same fate as Lehman Brothers (Merrill Lynch, Morgan Stanley, Washington Mutual); but there is little doubt that other major lenders or banks have yet to report the worst of their financial state or see the pinnacle of client withdrawals. With demand so high for risk-free, short-term bonds (the 3 month T-bill rate is at its lowest level since 1954), another emergency would make things seem exponentially worse. Looking beyond the short-term implications of the recent market crisis, traders will start to think about the impact to growth. With tens of thousands of jobs lost, borrowing at a stand still, investment collapsing, it is far more likely that the US economy is heading for a recession in the second half.
European Government Bonds
• Bank of England Hints At A Hold Despite Financial Turmoil
• Oncoming German Recession A Difficult Companion To Financial Turmoil
European Central Banks Stubborn On Rates, Loose With Cash, Difficult For Bonds
UK 10-Year Government Bond (Gilt) 4.433 -5bps
Like its US counterpart, 10-year Gilts continue to rise on demand that reflects a general state of panic among the investors. General trouble in the markets is only one facet of this advance however. As one of the financial capitals of the world, the UK is suffering double in the backlash against credit derivatives and other high finance products. Those seeking safe haven in liquidity and from default have found their way into UK government debt. However, this additional factor for investors in the United Kingdom comes along with a severe housing correction and the swift approach of a recession. Europe’s second largest economy was already suffering sharp drop in housing equity which has in turn ground consumer spending and general investment to a halt. As capital dries up and risk appetite further vanishes, secure Gilts will continue to be the main destination for most bank accounts. As that general trend unfolds, the market will also take a series of economic releases. Consumer spending will take the retail sales litmus test, though the outlook isn’t promising. More important in today’s general credit scare, net public sector borrowing, Rightmove house prices and BBA mortgage applications will measure the pain of the crunch on regular citizens.
German 10-Year Government Bond (Bund) 4.102 -5bps
Bunds, like their international counterparts, saw their yields drop through the past week – though at a much more reserve pace than Treasuries. As the financial market crisis unfolded, and credit seized up not only in the US but all over the world, the ECB jumped into action by first injecting $100 billion in overnight lending into the market. After these debts were repaid, the central bank then made additional loans to secure the immediate future of the markets; but conditions are obviously still fragile. With the European economy having already gone half way to a recession through the second quarter, this credit crunch is a burden that many feel the economy cannot handle. So, while all government debt is in demand during this financial crisis; there is a sense of forecasting where investors are considering where rates will be a year down the line and what kind of condition each economy will be in. As the ECB focuses on inflation control in its monetary policy decisions, there is speculation that the central bank expects a quicker rebound from the recent malaise than perhaps the US. Others think the ECB’s refusal to cut rates is simply delaying an economic slump that will rival its US and UK counterparts own downturns.
Asian Government Bonds
• Growth Outlook Fading Fast, Financial Crisis A Mere Catalyst
• BoJ Decision To Hold Doesn’t Even Show Up As A Blip On The Radar
Flight To Safety, Carry Unwinding Leads To JGBs
Japanese 10-Year Government Bond (JGB) 1.548 -11bps
Whereas Japanese Government Bond yields actually rose over the week before last, there was a sharp decline up to today. As the credit crisis proves itself to be a global issue, investors are finding their way back to the low yielding 10-year JGB. What’s more, repatriation of funds (due to liquidations for cash and unwound carry trades) is further boosting demand for a safe place to park capital in Japan. However, how safe will investors consider their money in Japan? As new stages of the financial crisis are reached, the more and more investors will be reminded of the Asian Financial Crisis of 1997/98. Demand for JGBs will almost certainly increase as risk aversion dominates the global investment scene. Even when that lets up though, there is still the potential for a Japanese recession and certainly a long depression in foreign demand for Japanese-made goods.
CFDTrading.com provides free news, trading resources, and market analysis to the trading community.
Treasury yields were hammered this past week. What was initially a general concern surrounding the health of the US and global financial markets has clearly turned into a full-blown crisis this week. The weekend raised the stakes quickly with the quick decline in Lehman Brothers.
US Treasuries
• Treasury Bill Yields Plunge to 1954 Low
• Are The Fed’s Rescues Putting The US Treasury In A Vulnerable Position?
A Full-Blown Market Panic Is Sending Traders To Treasuries
US 10-Year Treasury Note 3.756 -21bps
Treasury yields were hammered this past week. What was initially a general concern surrounding the health of the US and global financial markets has clearly turned into a full-blown crisis this week. The weekend raised the stakes quickly with the quick decline in Lehman Brothers. Without a viable buyer and no help from the Fed and Treasury Department, the venerable securities firm was forced into bankruptcy – the largest failure in history. This clearly bodes ill for the health of the markets (as the sale of their glut of inventory will constrict already tight liquidity), weighs on the outlook for employment and economic trends, and it also suggests the government won’t be the safety net that many investors had hoped for. When the Fed moved in to bail out the AIG with an $85 billion loan (at a steep price for the firm), the reaction was even worse than the failure of Lehman. Not only has the US Treasury taken huge sums of debt it may have to potentially hold for some two years; but they have implicitly signaled that conditions are so bad in the markets, that they have to pick and choose who is saved. AIG was certainly threatening a much more violent backlash than a mere securities firm going under.
Over the coming week, a few fundamentals will hit the wires; but the market will be solely focused on the health of the credit and financials. In the short-term traders will be looking for additional failures. We have seen a number of firms perhaps narrowly avoiding the same fate as Lehman Brothers (Merrill Lynch, Morgan Stanley, Washington Mutual); but there is little doubt that other major lenders or banks have yet to report the worst of their financial state or see the pinnacle of client withdrawals. With demand so high for risk-free, short-term bonds (the 3 month T-bill rate is at its lowest level since 1954), another emergency would make things seem exponentially worse. Looking beyond the short-term implications of the recent market crisis, traders will start to think about the impact to growth. With tens of thousands of jobs lost, borrowing at a stand still, investment collapsing, it is far more likely that the US economy is heading for a recession in the second half.
European Government Bonds
• Bank of England Hints At A Hold Despite Financial Turmoil
• Oncoming German Recession A Difficult Companion To Financial Turmoil
European Central Banks Stubborn On Rates, Loose With Cash, Difficult For Bonds
UK 10-Year Government Bond (Gilt) 4.433 -5bps
Like its US counterpart, 10-year Gilts continue to rise on demand that reflects a general state of panic among the investors. General trouble in the markets is only one facet of this advance however. As one of the financial capitals of the world, the UK is suffering double in the backlash against credit derivatives and other high finance products. Those seeking safe haven in liquidity and from default have found their way into UK government debt. However, this additional factor for investors in the United Kingdom comes along with a severe housing correction and the swift approach of a recession. Europe’s second largest economy was already suffering sharp drop in housing equity which has in turn ground consumer spending and general investment to a halt. As capital dries up and risk appetite further vanishes, secure Gilts will continue to be the main destination for most bank accounts. As that general trend unfolds, the market will also take a series of economic releases. Consumer spending will take the retail sales litmus test, though the outlook isn’t promising. More important in today’s general credit scare, net public sector borrowing, Rightmove house prices and BBA mortgage applications will measure the pain of the crunch on regular citizens.
German 10-Year Government Bond (Bund) 4.102 -5bps
Bunds, like their international counterparts, saw their yields drop through the past week – though at a much more reserve pace than Treasuries. As the financial market crisis unfolded, and credit seized up not only in the US but all over the world, the ECB jumped into action by first injecting $100 billion in overnight lending into the market. After these debts were repaid, the central bank then made additional loans to secure the immediate future of the markets; but conditions are obviously still fragile. With the European economy having already gone half way to a recession through the second quarter, this credit crunch is a burden that many feel the economy cannot handle. So, while all government debt is in demand during this financial crisis; there is a sense of forecasting where investors are considering where rates will be a year down the line and what kind of condition each economy will be in. As the ECB focuses on inflation control in its monetary policy decisions, there is speculation that the central bank expects a quicker rebound from the recent malaise than perhaps the US. Others think the ECB’s refusal to cut rates is simply delaying an economic slump that will rival its US and UK counterparts own downturns.
Asian Government Bonds
• Growth Outlook Fading Fast, Financial Crisis A Mere Catalyst
• BoJ Decision To Hold Doesn’t Even Show Up As A Blip On The Radar
Flight To Safety, Carry Unwinding Leads To JGBs
Japanese 10-Year Government Bond (JGB) 1.548 -11bps
Whereas Japanese Government Bond yields actually rose over the week before last, there was a sharp decline up to today. As the credit crisis proves itself to be a global issue, investors are finding their way back to the low yielding 10-year JGB. What’s more, repatriation of funds (due to liquidations for cash and unwound carry trades) is further boosting demand for a safe place to park capital in Japan. However, how safe will investors consider their money in Japan? As new stages of the financial crisis are reached, the more and more investors will be reminded of the Asian Financial Crisis of 1997/98. Demand for JGBs will almost certainly increase as risk aversion dominates the global investment scene. Even when that lets up though, there is still the potential for a Japanese recession and certainly a long depression in foreign demand for Japanese-made goods.
CFDTrading.com provides free news, trading resources, and market analysis to the trading community.
