DAILY MARKET COMMENTARY
December 11, 2013
Equities put in a sloppy performance today. The Dow dropped some -130 points, a decline of -0.82%. The S&P lost -1.19% while the NASDAQ dropped -1.40%. This is the largest 2-day selloff in a month. The Dow and S&P are now down for the 7th time in 9 days. Today’s concerns were the debt deal and what it does to the tapering decision at next week’s FOMC meeting.
Bond prices weren’t much happier although losses were moderate compared to equities. The 2-year closed at 0.30%, the 5-year at 1.49% (-5/32 on the day), and the 10-year at 2.84% (a drop of -12/32).
Today’s 10-year auction was deemed a dud. The awarded yield was 2.824%. The bid/cover ratio was 2.61 times (about average), but the dealers had to take down 40.5% (which is on the high side of recent underwriting loads). One would have expected the street to be a big bidder as they scramble to clear up the big short position in the 10-year note, but the market was still nervous about the somewhat weaker bid from central banks and other large investors. The auctioned note was offered at a yield of 2.855% at the close, producing a loss for underwriters.
The Ryan-Murray budget deal is getting its share of criticism. The far right complains that it depends too much on spending cuts in the out years while spending increases show up right away. The left complains about the elimination of long-term unemployment benefits. I guess any sort of bi-partisan bill is going to face detractors. The one uncompleted order of business is the debt ceiling. The bill increases spending somewhat, but doesn’t make room to pay for it. So we are still faced with a confrontation in March when the current ceiling is reached. Is this a budget deal to solve the impending debt crisis faced by America? No. However, it is just nice that legislators could agree on something.
One rumor I wrote about this week was the possibility that Janet Yellen would be approved by the Senate this week, causing Bernanke to resign before next week’s FOMC meeting (possibly as early as this Friday). Word out of the Senate suggests that the Yellen vote will not happen until next week, probably following the FOMC session that ends Wednesday. Bernanke can go ahead with his press conference following the meeting.
We have a budget deal! Paul Ryan from the House and Patty Murray from the Senate emerged from their behind-the-curtain meetings to announce a rare bipartisan agreement that actually looks like a budget. Assuming that the deal passes as it stands (and the House will vote on it before Friday when they recess for the year), this will be the first sort of formal agreement in several years. Unfortunately, the same old games are being played where spending increases happen now, while spending cuts are to be phased in over time. But let’s not quibble. One surprising development was the decision to stop paying benefits to the long-term unemployed. Granted, the employment situation is getting better and maybe Congress is trying to get people off the couch and back into the job hunt, but there are some 1 million people currently getting this benefit and that check is going to stop arriving in January.
Wall Street’s take on the budget deal has been rather blasé. In fact, the budget deal makes very little progress in addressing our long-term problems. It just keeps the government shutdown at bay until after the 2014 elections.
Stocks sold off yesterday as investors mulled the twin peaks of a potential budget deal and the subsequent impact a deal would have on the timing of QE tapering. Now that we actually have a deal, market reaction has been muted, at least to start the day. Stock futures are pointing to a small uptick. Asian stocks followed the downward direction of U.S. stocks overnight but European equities are somewhat higher today.
The debate will now turn to the FOMC meeting. One of the reasons the Fed did not start tapering in September was fiscal uncertainty. Now that uncertainty appears to be lifted, tapering is back on the front burner (according to analysts). Bernanke had said some time ago that tapering could begin when the unemployment rate got to 7%. It’s there. Stocks enjoyed another great year. What is the Fed waiting for?
Bond prices are falling, but only modestly. This follows a big uptick yesterday. The bond market has frustrated the shorts. We got a nice pop in non-farm payrolls which brought tapering back into play. The Treasury was set up for auctions this week and next. How can a short not make money? However, since the jobs data was released Friday bond prices have only gone higher. Traders were forced to cover shorts which thwarted their ability to get positioned to take on the new supply.
The 2-year is set to open at 0.30% (unchanged), the 5-year is 1.46% (-2/32), and the 10-year is 2.82% (a drop of -4/32).
Yesterday’s 3-year auction drew pretty good interest. The awarded yield was 0.631%. The note is offered today at 0.625%.
The 10-year today may be a different story. I wrote above that the current 10-year is in the middle of a short squeeze. The cost of borrowing 10-year notes has risen sharply. This makes it expensive to make good a delivery on a short sale. The current demand for the 10-year has stemmed from increased stripping activity (which splits the coupon from the principal and renders the bond unavailable for lending), as well as continued demand from the Fed for QE purchases (as the Fed doesn’t re-lend those notes back to the street). The 10-year at auction today is a re-opening of the current 10-year and this increased supply should help alleviate the temporary shortage of the November 10-year. The notes don’t settle until Monday so the delivery shortage will hang on at least until then. The awarded yield is expected to be 2.83%.
Director of Investment Sales
Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.
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