First, I need to clear the air on an issue that is cited over and over, of which causes me great discomfort. In last Thursday’s Financial Times, Robert Pollin and Michael Ash, the two professors who sponsored graduate student Thomas Herndon of UMass-Amherst–and of recent fame for finding the flaws in Rogoff/Reinhart–published the article heard round the world: “Why Reinhart and Rogoff are wrong about austerity.” I am not disputing the results of their work but I am questioning a causal relationship that they note:
Posts Tagged ‘U.S. Treasuries’
The market action has rendered this trader/analyst very weak and weary … quoth the trader nevermore. When FUNDAMENTALS MEET A DELEVERAGING SET IN MOTION IT IS ENOUGH TO LEAVE ONE WEAK AND WEARY. Every conversation I have had for three days is: What is wrong with the GOLD and how can it not rally with all the problems that the global financial system is facing? The corollary to the GOLD IS OF COURSE THE GLOBAL BOND MARKETS. Today, the SCHATZ traded down to three basis points. The U.S. 2/10 yield curve is undergoing a severe flattening as the curve closed at around 143 BASIS POINTS TODAY. The buying of high quality DEBT is indicative of a movement to havens coupled with the need for QUALITY COLLATERAL FOR THE REPO MARKET.
Do you have to be a weatherman to hear the wind blow? There are many cross currents alive in the investment world as the LTRO is behind us, ISDA defaulted on its role as a referee on global financial issues in the face of political threats from the EUROCRATS, and the Bernanke FED looks to be waiting for a new crisis to erupt before undertaking another further easing. March is always a difficult month for trading YEN as the JAPANESE CALENDAR YEAR ENDS MARCH 31 so repatriation of corporate profits is always a wildcard for any short YEN positions.
For many years the carry trade has been the mainstay of the RISK-ON profile. For some periods the ZERO INTEREST RATE POLICY of Japan forced money out of its system and in search of high-yield currencies in Australia, New Zealand, Brazil and other attractive venues. One of the best carry trades ever was LONG BRAZILIAN REAL/SHORT YEN as investors could fund the trade by borrowing YEN at very low rates and placing it in high yielding Brazilian bank accounts. As the Brazilian currency attained status as a commodity currency and, thus, a proxy for the China growth story, the BRAZILIAN REAL soared and the carry trade was a major win/win. When the U.S. FED went to an extreme low interest rate, the U.S. DOLLAR became a funding currency as the U.S. became a much less attractive place for global capital flows.
Last night the RBA, as expected, left rates unchanged at 4.75 percent. The statement released after the meeting was deemed semi-HAWKISH as the RBA noted the strength of India and China. The Australian central bank also opined that the massive Australian floods would result in pressure on wages as the rebuilding and repairing would bid away construction workers from the extremely buoyant mining sector. Some analysts had been bearish the AUSSIE DOLLAR based on lost productivity but GOVERNOR STEVENS ended that outlook.
Again, the world is given a Christmas “surprise.” Last year, the U.S. Treasury was nationalized Freddie Mac and Fannie Mae on Christmas Eve when no newsrooms were stirring with even a click of the mouse. This year, the Chinese Central Bank took center stage and announced a rate increase of 25 basis points. Now, I am convinced that this rate increase is NEGLIGIBLE to say the least. The world financial news is going to make this rate increase into an effort by the Chinese authorities to combat inflation but that is pure NONSENSE. The benchmark lending rate was raised 25 basis points to 5.81 percent and the benchmark deposit rate increased to 2.75 percent from 2.75 percent. The economic impact won’t even register.