10-year Treasurys fall as curve steepens

By Ben Eisen

NEW YORK (MarketWatch) — The 10-year Treasury note yield rose Tuesday, snapping a two-day drop as appetite for risk returned to the capital markets.

The benchmark /quotes/zigman/4868283/delayed 10_YEAR +0.29%   yield, which rises as prices fall, rose 1 basis point on the day to 2.746%, as investors left haven Treasurys for riskier assets. Stocks opened higher and the dollar strengthened.

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“It’s the unwinding of curve flatteners due to equity and U.S. dollar strength,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets, in e-mailed comments.

Tuesday’s moves reverse shifts in the Treasury market as investors priced in earlier policy rate hikes from the Federal Reserve, following a meeting last week that left markets with the impression that the central bank could cut off the flow of cheap borrowing sooner than expected.

Following the Fed meeting, the intermediate-term Treasury yields most sensitive to shifting Fed policy rose sharply while long-term yields fell, pushing the difference between them to its lowest point since 2009. That’s an indication that markets were moving forward with their rate hike expectations. However, the market reversed course Tuesday.

The 5-year note /quotes/zigman/4868109/delayed 5_YEAR -1.44%  yield fell 2 basis points to 1.717%, while the 30-year bond /quotes/zigman/4868063/delayed 30_YEAR +0.87%  yield rose 3 basis points to 3.602%. The differential, or spread, rose to 1.89 percentage points from 1.84 percentage points on Monday.

Charles Plosser, president of the Philadelphia Federal Reserve Bank, said Tuesday morning that last week’s meeting did not reflect a fundamental shift in the central bank’s policy, and that he was “a bit surprised” by the market reaction. He said he sees the Fed funds rate at 3% by the end of 2015, after correcting an initial error on-air with CNBC. While Plosser’s comments were taken as positive for stocks, the Treasury market wasn’t as convinced.

 

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“The Fed seems to be ahead of reality here,” said di Galoma, adding that Plosser’s comments were taken with a grain of salt.

Treasurys pared losses after a round of economic data. New home sales dropped 3.3% in February to an annual rate of 440,000, matching economist expectations. Consumer confidence rose to 82.3 in March from an upwardly revised 78.3 in February, according to Conference Board data on Tuesday.

The S&P/Case-Shiller’s 20-city composite index of home prices fell 0.1% in January, marking its third straight month of drops on the back of cold winter weather. On a seasonally adjusted basis, the index showed a rise of 0.8%. The Federal Housing Finance Agency said its data showed a 0.5% rise in prices in January.

An auction of $32 billion in 2-year Treasury notes /quotes/zigman/4868354/delayed 2_YEAR -2.67%  is at 1 p.m. Eastern.

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More Thoughts about Potential QE from the ECB

by Marc Chandler

There seems to be a stepped effort by ECB officials to talk the euro down. The process began with Draghi last week indicated that the euro has become a more salient factor as it poses a deflationary risk and threatens the fragile economic recovery. 
Earlier today, Bundesbank President Weidmann specifically did not rule out quantitative easing but opined that a negative deposit rate might be a better tool to weaken the euro. 
Slovakia's central bank governor indicated that the ECB was preparing measures to avoid a deflationary environment, though did not specify the measures.  He did indicate he could support QE if necessary. 
Net-net there has been little effect from the verbal jousting.  Recall earlier this month, when the ECB refrained from taking fresh action, the euro moved above the top of the $1.33-$1.38 trading range that had confined the single currency since last October.  It is trading just below $1.38 now, remains above the low of $1.3750 before the weekend and $1.3760 yesterday. 

The market does not seem convinced. After being taken in by the OMT, which has not been operationalized, investors need to see real action to be convinced.  "Show us the money," they say.  At the same time, there is broad recognition of the legal and technical obstacles to the kind of QE adopted by the Federal Reserve, Bank of England and the Bank of Japan.

We suggested that a way to square the circle would be to apply the Swiss strategy.   Recall, when the Swiss National Bank wanted to enact a QE operation, it was constrained by the (small) size of its domestic market.  Instead, the SNB bought foreign bonds.  The ECB is constrained, not by the size of  the bond market, but by the interpretation of its legal charter.  We argued that ECB can buy foreign bonds, such as US Treasuries.
Former ECB Director Bini Smaghi seemed to be moving in this direction in an editorial in the Financial Times at the end of last year.   He recognized that there were no easy solutions for the ECB.  He discussed the merits of a negative deposit rate and suggested it could force financial institutions with excess liquidity to export it out of the euro area.  He also noted that sterilization of the bonds bought under the SMP plan could cease, or shift to allow the use of foreign currencies.
The ECB can intervene in the foreign exchange market, which is what purchases of foreign bonds would look like, without prior authority for finance ministers.  It can do so directly or through the activity of the national central banks.  It can fund such an operation with its reserves or through fx swaps and swaps with other central banks.  
The only constraint on the ECB appears that it must consistent with its primary objective of price stability. Given the deflationary risks and the persistent strength of the euro, clearly a foreign bond buying program can be justified by the ECB.   It would also help address other ECB challenges, which include weak growth in money supply (M3).  Excess reserves would likely increase, and this could help stabilize EONIA at lower levels.  To the extent that it was successful in pushing the euro down, it could also aid in the recovery of the periphery.
This also seems to be a superior alternative to the potentially disruptive negative deposit rate, which would also likely have unintended, though not unforeseeable consequences, for the money market funds and the wholesale funding of financial institutions.  It avoids the legal morass of a conventional QE program.  It is likely to be more effective than a token cut in the 25 bp refi rate, or reducing the upper end of the ECB's rate corridor (75 bp lending rate).
This does not mean that the ECB will adopt the Swiss strategy.  However, if the market has erred with Draghi is not appreciating the boldness of his actions.  Many are too caught up with the controversial OMT, and forget that he cut rates at his first two meetings as ECB President, unwinding Trichet's blunder and offered not one but two long-term repos.  He also cut rates last November, choosing not to wait for updated staff forecasts.

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Iraq Buys Massive 36 Tonnes Of Gold In March

by GoldCore

Iraq Buys Massive 36 Tonnes Of Gold In March

Gold rallied from the lowest price in more than four weeks on safe haven demand after the G7 nations threatened more sanctions against Russia after the annexation of Crimea.

Meeting for the first time since last week’s annexation of Crimea by Russia, G7 leaders said they won’t attend a G8 meeting that had been set for Sochi, on Russia’s Black Sea coast, and will instead hold their own summit in June in Brussels. The G7 said in a statement that they remain ready to “intensify actions”, including coordinated sectoral sanctions.

Trading volumes on the COMEX in New York today are 49% higher than the average for the past 100 days for this time of day, according to data compiled by Bloomberg.

Palladium fell 1% to $786.20 an ounce. The precious metal rose above $800/oz yesterday, the highest  since August 2011, on concern that supplies from top producer Russia will be disrupted.

The Central Bank of Iraq said it bought 36 tons of gold this month to help stabilise the Iraqi dinar against foreign currencies, according to a statement from the bank that was emailed this morning.

It is very large in tonnage terms and Iraq’s purchases this month alone surpasses the entire demand of many large industrial nations in all of 2013. It surpasses the entire demand of large countries such as France, Taiwan, South Korea, Malaysia, Singapore, Italy, Japan, the UK, Brazil and Mexico. Indeed, it is just below the entire gold demand of voracious Hong Kong for all of 2013 according to GFMS data (see chart).

Demand By Country (GFMS via Thomson Reuters)

Iraq had 27 tonnes of gold reserves at the end of 2013 according to the IMF data and thus Iraq has more than doubled their reserves with their allocations to gold this month. Gold remains less than 5% of their overall foreign exchange reserves showing that there is the possibility of further diversification into gold in the coming months.

The governor of the Iraqi Central Bank, Abdel Basset Turki, told a news conference that, "the bank bought 36 tonnes of gold to boost reserves and this move is to strengthen the financial capacity of the country and increase the elements of security and insurance reserves of the Central Bank of Iraq."

He said, “the purchase quantity comes with the aim of achieving the highest stages of the financial soundness for Iraq”. He pointed out that the measure comes within the purview of the central bank in the use of the fiscal policy tools  of Iraq.

"The Bank has purchased large quantities of gold bullion with a very high purity and in accordance with the approved international standards," according to the Iraqi central bank.

He added that "the central bank seeks through the purchase of large quantities of gold to stabilize the Iraqi dinar against foreign currencies.”

Iraq quadrupled its gold holdings to 31.07 tonnes over the course of three months between August and October 2012, data from the International Monetary Fund shows. The IMF's monthly statistics report showed the country's holdings increased to some 23.9 tonnes in August 2012 to 29.7 tonnes.

That was followed by a 2.3-tonne rise in September to 32.09 tonnes and then a cut of 1.02 tonnes in October 2012 to 31.07 tonnes.

It is Iraq's first major move to bolster its gold reserves in months.

The central bank of Iraq’s doubling of its gold reserves this month is important as there are many oil rich nations in the world with sizeable foreign exchange reserves, primarily in dollars, and only a small allocation to gold by these central banks alone could lead to higher gold prices.

36 tonnes is a lot of physical gold, however in terms of dollars it is worth just $1.522 billion which is a tiny fraction of the $80 billion of foreign exchange reserves that Iraq holds.

Energy rich Russia alone has foreign exchange reserves of some $440 billion. Should they decide to allocate a sizeable portion of their reserves to gold, it would rapidly result in materially higher prices.

Signs that the global economy is slowing down and the most serious confrontation between Moscow and the U.S. and its allies since the end of the Cold War is likely to lead to central banks continuing their foreign exchange diversification.

Central banks and the smart money will continue to dollar cost average and accumulate bullion on dips.

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Soybeans Rise as Investors Weigh Stockpiles Against U.S. Acres

By: Bloomberg

Soybeans rose in Chicago, erasing an earlier decline, as investors weighed signs of tight supplies left over from the past U.S. harvest against planting that’s expected to reach a record in the country this year.

U.S. inventories probably totaled 987 million bushels on March 1, the lowest in 10 years for that date, according to a Bloomberg News survey before the U.S. Department of Agriculture releases its quarterly grain stocks report March 31. The USDA will release results of its national planting survey of growers the same day, which may show farmers will sow a record 81.16 million acres next season, analysts said.

"Our biggest concern for this report will be bean acres," Paul Georgy, the president of Allendale Inc. in McHenry, Illinois, said in an e-mailed note today. "Beans have found strength the last few weeks but it is hard for us to imagine continued strength as we get close to this report."

Soybeans for May delivery rose 0.2 percent to $14.2825 a bushel by 7:45 a.m. on the Chicago Board of Trade, after swinging between gains and losses. The oilseed is up about 11 percent this year as U.S. stockpiles tightened after a surge in exports to China.

Corn for delivery in May fell 0.4 percent to $4.88 a bushel in Chicago, paring yesterday’s 2.3 percent advance. Corn stockpiles on March 1 probably totaled 7.098 billion bushels, 31 percent higher than a year earlier, according to Bloomberg’s survey. U.S. planting may decline 2.5 percent from the prior year to 93.014 million acres, analysts said.

Wheat for May delivery declined 0.7 percent to $7.095 a bushel, reversing an earlier advance of 0.2 percent. Futures jumped 3.1 percent yesterday as dry weather caused crop conditions to deteriorate in the U.S., the biggest exporter. Milling wheat for November delivery in Paris fell 0.2 percent to 205.75 euros ($283.79) a metric ton on NYSE Liffe.

U.S. inventories of wheat dropped to 1.05 billion bushels on March 1, the lowest since 2009, according to the Bloomberg survey. Twenty-one percent of the winter crop in Kansas was in poor or very-poor condition as of March 23, compared with 20 percent a week earlier, while the crop in Texas rated 55 percent poor or very poor, up from 52 percent, the USDA said yesterday.

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Junk bonds/High Yield funds acting ok! Do watch for a breakout here!

by Chris Kimble

CLICK ON CHART TO ENLARGE

High Yield funds are considered by many to be good leading indicators for the future direction of the stock market. Above are four high yield funds (Not ETF's) which reflect they are moving higher this year, all are above rising support and above their 200 day moving average lines.

One would have to say, no concerning message from High Yields at this time is being sent!

The inset box reflects that the adjusted spreads in the high yield sector are reaching historically low levels.  History has shown they can stay this low for a long time. Of note, notice that the breakout above resistance back in 2007 was a signal equities were in danger of lower prices in the future. A similar pattern is taking place again in spreads. If the spread breaks to the upside, a concerning message would be coming from the High yield complex!

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Yellen's comments confused markets last week

By John Caiazzo

Overview and Observation

I am not sure who will "blink" first but whether it is President Obama or President Putin the markets weigh each rhetorical statement and take action in expectation of one or the other. If the President blinks then Crimea becomes Russian and perhaps everything gets back to "normal". If Putin blinks then the Russians living in Crimea will be up in arms protesting their vote did not count and other negative actions could occur. Then comes the sanctions from both sides. Our main concern is the flow of crude and natural gas through Ukraine from Russia to the European countries relying on that energy. We will have to wait and see and hope some semblance of normalcy returns to the region. Meanwhile those of us that have to try to make sense of it all and come up with recommendations for our readers and clients are left "scratching our heads" for now. I will offer my usual comments based on the basics of supply/demand whether anticipated or in reality for my readers. Now for some of those comments………

Interest Rates: June Treasury bonds closed Friday at 132-22, up 20/32nds on short covering after recent selling tied to the "confusing" statements by the new Fed Chair, Janet Yellen. She may have misspoken when she suggested the Central bank could begin raising interest rates about six months after ending its bond purchase program. We continue to feel Treasuries will remain in a range since we see no reason to expect rate changes either up or certainly not down since "zero" is as low as the Federal Funds rate can go albeit other rates are flexible. Hold strangle spread positions.

Stock Indices: The Dow Jones industrials closed at 16,302.77, up 28.28 points and for the week gained 1.5%. The S&P 500 closed at 1,866.40, down 5.61 points but for the week gained 1.4%. The Nasdaq closed at 4,276.79, down 42.50 points but managed a gain of 0.7% for the week. The activity on quadruple witching day played a role in the back and forth action in the indices. Stocks had declined on Wednesday after the new Fed Chair; Janet Yellen suggested the Fed could begin raising rates six months after the end of their bond purchase program. Stocks rallied after that when the Philadelphia Federal Reserve reported positive manufacturing data. The markets weigh each Fed statement and act accordingly due to the ramifications of any Fed action. We remain convinced the market is fast approaching the "rim" of a "black hole" and suggest strongly the implementation of risk hedging strategies for holders of large equity portfolios.

Currencies: The June U.S. dollar index closed at 80.26, down 9.3 points but managed a weekly gain after the Federal Reserve seemed to suggest rate increases sooner than earlier statements indicated after the Fed meeting. Any increase in rates attracts dollar investment even if the rate remains unchanged but Euro rates adjust lower. Other currencies traded as follows, the Euro gained 13 ticks to close at $1.3792, the Swiss Franc 15 ticks to $1.1339, the Japanese yen 29 points to 0.09793, the Canadian dollar 19 points to 88.96 and the Australian dollar 49 points to 90.35. The British Pound lost 10 ticks to close at 1.6483. We are watching carefully the ongoing Ukraine situation and what the various sanctions from either the U.S. President or the Russian President will mean to global economies. For now stay with the dollar.

Energies: May crude oil closed at $99.46 per barrel, up 56¢ on short covering and against the weak U.S. dollar in which it is denominated. The main factor of course is the Ukraine crisis and concern that Russia controls the "spigot" for crude and natural gas flowing through Ukraine to Europe. We will have to wait and see if some calm can be restored to the ongoing rhetoric between the U.S. President and the Russian President. For now we remain bearish for crude based on supply/demand considerations.

Precious Metals: April gold closed at $1,336 per ounce, up $5.50 tied to the weak dollar and on short covering. For the week gold lost 3.1%, its largest weekly loss since Nov. 22. Once again we are on the sidelines even as geopolitical events are unfolding as related to the standoff between the U.S. and Russia over Ukraine. May silver closed at $20.31 per ounce, down 12¢ and for the week lost 5.3% which was its largest weekly loss since September. We are on the sidelines here as well but for those that "must have" a precious metal in their portfolio, we continue to prefer silver over gold. With Russia a main exporter of palladium along with South Africa, where strikes have cut exports, prices moved accordingly with Palladium gaining 22.00 or 2.9% to close at $793.65. Platinum which is also produced by Africa closed at $1,436.50, up $7.00. Once again we prefer palladium over platinum solely on the basis of percentage gain possibilities.

Grains and Oilseeds: May corn closed at $4.78 ¾ per bushel, up slightly and remains near its recent highs since trading as low as $4.14 in December of last year. We are awaiting end of month reports on grains so no comment for now other than to suggest holding long positions but raising trailing stops. May wheat closed at $6.92 per bushel, down 11 3/4c on long liquidation after the sharp price gains tied to the drought in the Southern U.S. plans. We prefer the sidelines for now pending further data at the end of the month. May soybeans closed at $14.08 ¾ on recent cancellations of orders by China and expected Brazilian crop record even though initially thought to be lower than expected. We had been long soybeans for clients but got out recently. For now we prefer the sidelines.

Coffee, Cocoa and Sugar: May coffee closed at $1.71 per pound, down 3.15¢ on long liquidation after the sharp run-up in prices tied to the concern over drought in Brazil and on disease. A fungus that attacked coffee has damaged over 20% of the global supply according to the Costa Rican Coffee Institute. Coffee traded as high as $2.0975 recently and was due for a correction. Current levels could hold but we prefer the sidelines. May cocoa closed at $2,951 per ton, down $23 on profit taking after the recent price gains. The global shortfall projected early this month prompted the sharp rally in cocoa prices from the $2,600 lows of last December to $3,000 and a correction was due. We had projected that cocoa would reach $3,000 and our goal has been achieved. For now we are on the sidelines. May sugar closed at 16.86¢ per pound, down 19 points and remains nearly midway between the recent low of 15¢ and recent high around 18¢. We are on the sidelines awaiting further fundamentals.

Cotton: May cotton closed at 93.53¢ per pound, up 1.35¢ and remaining near highs after rallying steadily from last Novembers low of 77¢. The Chinese farm support policy has withheld exports but its huge inventory could present a threat to prices going forward. For that reason we are on the sidelines but the purchase of some puts may be in order from here. Prices of a particular commodity can only be supported artificially for a time but at some point true supply/demand fundamentals will eventually prevail.

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