Just a quick update. First, long-dated U.S. treasuries rallied today after a stronger-than-expected 30-year government bond auction. There was strong interest from foreign central banks. Adding fuel to the rally was comments from Japan's finance minister Kaoru Yasano stating that he is confident about the outlook for U.S. bonds.
And so continues the tug-of-war between the Fed and foreign central banks (which wish to keep long-term borrowing rates manageable and, in the case of foreign central banks, to keep their currencies weak versus the dollar) and the bond vigilantes who are concerned and irate over the amount of debt and dollars the U.S. is printing. Who will win? The vigilantes, eventually, but the Fed and foreign investors will keep the rate rise modest. I think that if we see a 4.50% 10-year note in 2009 it will be the extent of the rise.
A word of advice for those involved in preferred exchanges into common. Assume that the equity price is fundamentally correct and that the preferred price has to adjust to parity with the common at your own peril. For one, trading at parity will not happen because that will mean no bid ask spread. Without the spread, no profit potential. Secondly, learn what a short squeeze is. Just as the preferreds have rallied due to the arbitrage, the common is at current levels due to a short squeeze. Watch them both drop after the exchange.
1 comment:
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