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March T-bonds last Thursday consolidated above the 8-week low of 125-26 (12/24/98) where they sold off by 5-06/32 points from the 2-1/2 month high of 131-00 (12/10/98). The cash 30-year bond yield last Thursday consolidated below the 6-week high of 5.233% (12/24/98) where it rebounded by a total of 30.8 bp from the Dec 11th 2-1/2 month low of 4.925% (matching the Oct 16th low). June Euros last Thursday held above the 3-1/2 month low of 94.93 (12/24/98) where they sold off by a total of 96.0 bp from the contract high of 95.89. |
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Bearish factors included (1) the plunge in the dollar, (2) long liquidation pressures following last week's brief rebound, (3) some long-term concerns about the advent of the euro and any subsequent asset reallocation, (4) supply pressures ahead of Wednesday's 10-year indexed bond auction and the expected flood of corporate supply to start the year, and (5) some carryover pressure following the tumble in March JGBs which kept alive concerns about Japanese Treasury sales. Bullish factors included (1) Thursday's sharp sell-off in US stock prices, and (2) the underlying weakness seen in last Thursday's regional Purchasing Managers indexes. |
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The US credit market begins the New Year with relative stability on the global crisis front, continued strength in the US economy, and a high-flying stock market. This combination of events led the Fed at its November FOMC meeting to shift back to a neutral policy from its former bias toward easing. The release of the Nov FOMC meeting minutes prompted the market to significantly downgrade the chances for another Fed easing any time soon. |
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The shift in the market's outlook regarding the Fed is plainly visible in the fed funds futures curve which flattened dramatically in the past 2 weeks. The Feb contract last Thursday closed at 95.28, thereby pricing in a 4.72% funds rate or no chance of an easing at the FOMC's next meeting on Feb 2-3. The April contract settled at 95.33, pricing in a 4.67% funds rate or about a 30% chance of a 25 bp easing at the March 30th meeting. The June contract settled at 95.35, thereby pricing in a 4.65% funds rate or about a 40% chance of a 25 bp easing by mid-year. |
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