Will the Fed pause in September?

[Quips]

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It may be interesting to note the increased tendency for the yield rate to flatten. I can only comment on the obvious: something is overpriced and something has got to give.

30 year government bond rates --yields -- have dropped (prices have increased) 0.18% from a month ago

10 year government bond rates -- yields --have dropped (prices have increased) 0.28% from a month ago.

5 year government bond rates -- yields --have dropped (prices have increased) 0.31% from a month ago.

2 year government bond rates -- yields -- have dropped (prices have increased) 0.24% from a month ago.

One would expect a larger spread between the 2 year and 5 year yields; but not a smaller or decreasing spread from 5 year to the 30 year.

That shows the market expects more in the way of shorter term risk; the market also shows that longer term maturities may be overvalued; for instance the 10 year yield is now 4.11% and the 30 year yield is 4.39%.

So, the Fed raises its overnight lending rate on a "measured pace"; longer term maturities are not budging so far... its price is not dropping. Those who are holding long term debt have the most to lose if those prices drop. There must be many holders of great sums of debt since there seems to be no problem with its float. That tells me there are buyers of that debt out there and they are comfortable with the price they are paying for it so far. There is no premium being paid for taking on more debt so far.

Domestically, real estate appreciation is doing better than either equity or debt instruments. It matters if it is artifical because of speculation or if it is real; there are a great many contruction cranes on new projects in downtown Miami; and there will be many more the greater New Orleans environs.

If real estate is not a bubble here, then long term (low) interest rates will be maintained. However, the rate of appreciation of real estate itself counters its duration. So far the ability to make good on long term debt remains in tact as well.

But I would suppose making good on long term debt is one thing, and future growth is another ... especially for the equity markets.

The market is showing us that the cost of long term debt is acceptable especially for assets that appreciate in value; and is preferable -- so far -- when compared to other investments.

 

[JOVARN]

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Quips can you give me the site you used to get the currency report for Saturday.

The last report on the Dollar I saw was from A.P and that was for Fridays close

AP
Dollar Falls Against Euro
Friday September 9, 6:32 pm ET



Dollar Falls Slightly Against the Euro and Other Currencies





Thanks

Jo

 

[Quips]

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Jo:

I get most ofmy info from http://www.bloomberg.com

Like most here I work full time, and currently the commute adds another couple hours each way to that, so I haven't lots of time to peruse things like the Wall Street Journal or Barrons.

However, I don't see the value of trying to time the market on a daily or weekly basis. I did subscribe to a market timing newletter, and will re-subscribe to it at the beginning of 06. Until then I will coast on its recommendations, but even so the writer of the letter doesn't make very many changes ... maybe a major change every 3 to 4 years if it is necessary.

There is another market timing service out there just for TSP and for a fee, supposedly, it maximizes market returns. I see some on this board try to achieve the same purpose by the same means, so I will not cast any stones at them. Whocan rag about how others spend or invest their own assets? In some cases it involves thousands, tens of thousands and some beyond that. What they do does not hurt anyone unless their readers follow their advice ... and that can be very dangerous.

Conversely, some strategies and advice here can be very beneficial. Some are very bearish, some are very bullish, some are in the middle, and some try to successfully be all over the place. Be that as it may, the bottom line is everyone is out for themselves to pay their own mortgages/rents or to deal with their own girlfriend/wife and feed back here will only offer chit-chat in the way of congratulations or sympathy.

 

[Quips]

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Treasuries May Extend Gains as Fed Sticks to `Measured' Pace
Sept. 12 (Bloomberg) -- U.S. Treasuries are likely to extend a 14-month rally as the Federal Reserve sticks to its ``measured'' pace of interest-rate increases to keep inflation from accelerating after Hurricane Katrina.

Treasuries maturing in 10 years or more gained as the central bank raised its interest-rate target 2.5 percentage points since June 2004 on signs inflation remained tame. The benchmark 10-year note's yield dropped to 4.12 percent on Sept. 9 from 4.69 percent the day before the Fed started raising rates, lowering borrowing costs for companies and consumers.

After the hurricane caused record damage along the Gulf of Mexico coast, speculation mounted the Fed may pause after 10 consecutive rate increases to assess the economic effects from Katrina. Interest-rate futures show traders last week renewed bets the Fed will lift rates at its Sept. 20 meeting. A Bloomberg survey showed economists boosted estimates for inflation even as they lowered forecasts for economic growth.

``The Fed is raising rates not because of an acceleration of growth, but because of concerns they have about inflation,'' said Michael Materasso, who oversees $19 billion as head of fixed income at Fiduciary Trust Co. in New York. Additional increases ``would be good for the long end of the market,'' while a pause may send bonds down, he said.

The benchmark 10-year note's yield rose 8.2 basis points, or 0.08 percentage point, last week, recouping more than half the decline after Hurricane Katrina hit. Chicago Fed President Michael Moskow and San Francisco Fed President Janet Yellen suggested in speeches they are concerned about faster inflation.

Fighting Inflation

The 4 1/4 percent note posted its first weekly loss since the week ended Aug. 5, falling 11/16, or $6.88 per $1,000 face amount, to 101 1/16. The note's yield rose less than the yield on the benchmark two-year note, which is more sensitive to changes in monetary policy. Two-year yields surged 12 basis points to 3.87 percent.

A Sept. 9 survey of 38 money managers who oversee a combined $1.27 trillion found that 61 percent said the Fed shouldn't pause. Seventy-nine percent in the poll by Jersey City, New Jersey-based Ried, Thunberg & Co. said the risk of faster inflation, which erodes the purchasing power of fixed income payments, would rise without an increase. The survey showed participants expect 10-year notes to fall by year-end.

Long-term yields ``have been falling because as the Fed's been raising rates, the market has taken comfort that they're fighting inflation,'' said James Bianco, president of Chicago- based Bianco Research LLC. ``If the Fed pauses it could produce higher interest rates.''

How much yields rise depends on how long the respite lasts, Bianco said. Ten-year yields may return to the year's high of about 4.70 percent should the central bank goes months without raising rates, he said. Increases at each of the Fed's three remaining meetings this year will likely keep the note's yield between 4 percent and 4.25 percent, Bianco said.

`Stopping Short'

The October federal funds futures contract shows traders see a 78 percent probability of a rate increase next week, up from about 70 percent a week ago. Before the storm, they expected about a 100 percent chance of an increase.

The consumer price index will rise 3.5 percent this quarter, up from a forecast of 3 percent a month ago, according to the median forecast of 54 economists surveyed by Bloomberg between Aug. 31 and Sept. 8. A Sept. 15 government report may show prices, excluding food and energy, increased 0.2 percent last month, in line with the average since 1999, the median estimate in a separate survey showed.

Treasuries maturing in five years or less ``are a better value in this environment with inflationary threats and with the potential of the Fed stopping short of where they would have based upon a slower economy'' resulting from Katrina, said Bill Gross, chief investment officer at Newport Beach, California- based Pacific Investment Management Co. and manager of the world's biggest bond fund.

`Collateral Damage'

The economy will expand at a 3.6 percent annual rate from July through September instead of the 4.1 percent forecasters predicted a month ago, according to the median estimate of 57 analysts surveyed by Bloomberg from Aug. 31 to Sept. 8.

Investors such as Marc Seidner, who oversees $26 billion of bonds at Standish Mellon Asset Management in Boston, said the economy is too fragile to withstand higher rates.

``The more the Fed raises interest rates, the higher the probability that there is collateral damage to the economy,'' he said.

Hurricane Katrina destroyed property worth at least $125 billion, according to storm modeler Risk Management Solutions Inc. It shut 10 percent of U.S. refining capacity, pushing gasoline futures to a record $2.6145 a gallon on Aug. 31. The Congressional Budget Office on Sept. 7 said Katrina may cut U.S. jobs by 400,000 this year.

Inflation Estimates

Some investors and Fed officials are concerned that energy prices won't drop and will feed through to so-called core inflation, which excludes food and energy prices. The Chicago Fed's Moskow said Sept. 7 that inflation on that basis is ``running at the upper end of the range that I feel is consistent with price stability.''

Yields on Treasury inflation-protected securities, known as TIPS, show expectations for inflation have risen. The difference in yields between 10-year TIPS and fixed-coupon Treasuries widened to a four-month high of 2.48 percentage points. The so- called break-even rate shows the expected pace of inflation over the life of the securities. TIPS pay interest at lower rates than regular Treasuries on a principal amount that increases in line with the consumer price index.

``Of the two main challenges for the Fed, a slight slip in activity versus a pick-up in inflation, we think insuring long- term price stability is the more pressing issue,'' said Jason Evans, head of U.S. Treasury trading in New York at Deutsche Bank AG. The firm is one of the 22 primary dealers of U.S. government securities that trade with the New York Fed.