CNBC Online, November 20, 2009
There was enough discouraging news around Thursday to remind investors that the economy could easily tilt down again.
Friday’s markets have no economic indicators to consider, but Dell’s disappointing after the bell earnings could spill into tech stocks.
Stocks Thursday finished lower, but well above lows of the day. The Dow was down 93 at 10,332 and the S&P 500 slipped 15 to 1094.
"It’s all about the dollar," said one stock trader. The dollar index rose, while the dollar gained 0.3 against the euro. The euro was at $1.4919. Commodities were lower, with oil down 2.7 percent to $77.46 per barrel. Gold though edged up slightly to $1,141.90 per ounce.
Tech stocks were also a factor in Thursday’s market. Intel was the biggest drag on the Dow and the semiconductor sector was lower after Bank of America Merrill Lynch slashed its 2010 outlook for the group and downgraded 10 stocks. Another negative was the Mortgage Bankers Association report that 14 percent of homeowners are either delinquent or in foreclosure, raising the prospect of a double dip real estate recession.
The markets though ignored the weekly jobless claims, which were in line with expectations and at a 10-month low. However, the leading economic indicators were a bit disappointing, rising 0.3 percent, short of the 0.5 percent expected.
As stocks fell, Treasury prices rose. Yields dropped as a result, particularly in shorter duration securities. The yield on the 10-year fell to 3.349 percent and the 2-year fell to 0.717 percent, its lowest yield since the thick of the financial crisis last January. Its yield in fact dipped as low as 0.676 percent.
But even with the negative tone in markets Thursday, the trade in Treasurys was not a panicky flight to safety from risk assets. It was more of a flight to a safe parking lot for capital.
"This is the driving factor. There’s a collateral squeeze going on, meaning there’s a lot of cash in the system but even with all the Treasurys in the system, there’s not enough around. You can’t have cash invested in a mattress, you have to have it in something, even if it’s an overnight repo," said David Ader, CRT Treasury strategist.
Ader said the flurry of buying in bills, in fact, resulted in negative yields on January dated t-bills. The Treasury released details of its $118 billion auction of 2-, 5- and 7-year notes and $62 billion in 3- and 6-month bills next week. It did not announce a cash management bill.
"We’re up against the debt ceiling limits so the easiest place for the Treasury to lower issuance is to cut bill issuance," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald.
"There’s not much yield in bills ," said Edmonds, adding investors are making sure they have Treasurys on their books. "They’re the safest asset at year end," he said.
The transformation of the financial industry may be playing a role in the bond market. In years past, investment banks, with year ends in November, added liquidity to the market. Now, Lehman and Bear Stearns are gone, and Goldman Sachs and Morgan Stanley have converted into banking institutions.
"We haven’t gone through this in quasi normal circumstances," said Ader. "Whatever those guys would have been doing with their positions.. they could have been lending them out..there could have been more collateral in the system, now they have to hold them like anyone else."
Edmonds said the Fed’s November meeting set the tone for the rest of this year when it declined to signal it could raise rates.
"We now have the Fed stuck on the zero interest rate policy for some time, and I don’t think there’s anything to do about that," said Edmonds. "I think what it’s doing is forcing people out the Treasury curve and also into riskier assets."