It's Just Another Day

After yesterday's weaker than expected 10-year auction I was wondering if foreign investors were losing their taste for long-dated treasuries. Then I began to think (always dangerous thing). The auction took place prior to the FOMC statement, a statement in which the Fed stated that inflation is expected to remain subdued. If the Fed had made its statement before the 10-year auction it is quite possible that the auction would have attracted more interest.

Another factor which encouraged investors to extend out on the curve were today's poor Initial Jobless Claims and Advance Retail Sales reports. Backing out the Cash for Clunkers influenced auto sales data and retail sales fell 0.6%. Even with the help of gasoline sales, retail sales came in at -0.4%. No one has yet explained to me how the consumer (who has accounted for 70% of U.S. economic activity) is going to lift this economy off of the financial ocean floor without jobs and without irresponsible leverage and lending practices? The answer is that the consumer is not leading us out of this. Slow positive growth will settle in once the benefits of inventory replacement is over.


Better late than never Mr. Gross. Pimco announced that is sees value in bonds in the utility, large bank and finance and energy sectors. This means that PIMCO has already acted and has gone long these sectors. Fund managers always tell you what to do after they have acted for their clients. I have been advocating such bonds for months.

Bloomberg News reported:

Yield premiums have now returned to about what they were before the collapse of Lehman Brothers Holdings Inc. in September, Curtis A. Mewbourne, a managing director and portfolio manager at Newport Beach, California-based Pimco, said in a research report today. While systemic risk has subsided and investors have re-entered the market, economic and business conditions are "significantly worse" than in the third quarter of last year, Mewbourne said.

Mr Mewbourne went on to say: "Yield spreads for high-quality investment grade corporate bonds are still wide relative to historical levels, and we think attractive risk-adjusted value still exists in certain areas of this market," he said. "There is a clear disconnect between financial markets and underlying fundamentals."

I would agree with that but would caution investors against expecting financial sector bonds from moving much tighter than the widest of their historical spread ranges. I would also caution against expecting spreads tightening anywhere near levels seen during the middle of the past decade. Increased debt loads, softer earnings and more cautious investors will keep spreads somewhat wide, but somewhat more narrow than today's levels.