Can't Get Enough

It takes a big man to admit he is wrong. Fortunately for me, I have had much practice over the years. A few days ago I opined that we could see a softening of demand for longer dated U.S. treasuries as the modest recovery takes hold. That is not how things played out.


Yesterday's 10-year auction generated much interest from foreign central banks. In fact, 35% of bids for the reopening of the 10-year treasury were indirect bids. Indirect bidders consist mainly of foreign central banks. With no safer place to park their dollars (generated from selling goods in the U.S.) and not wanting to convert dollars to their home currencies, thereby strengthening their currencies versus the dollar, harming exports. Foreign central banks were also strong buyers of the 30-year government bond. The bid to cover ratio was 2.89 versus an average of 2.48 during the last 10 auctions. Although it is true that indirect bids of 23.9% today was down from the 28.5% seen when the current long bonds were originally issued in February, this is not a poor result for long paper in the midst of record stimulus and deficits.

Professional fixed income investors, including foreign central banks do no fear robust growth and sky-rocketing inflation. The moderating effects of deleveraging, slow job growth and the potential for anti-growth legislation weigh heavy on the minds of fixed income market participants. This is in sharp contrast to equity bulls who have now taken to touting the belief that the government will guarantee that no large institution will fail as a strategy (heard this on Fast Money on 3/9/10).

This is not to say that we are heading for a stock market crash. It is quite likely that equity markets continue to advance, but the advance will be at a pace which is slower than to what we have become accustomed. Investors should be thankful that the equity markets have rebounded the way they have during the past year.

However, investors must face the fact the the equity market recovery, indeed the economic recovery as a whole, has thus far been due to government economic stimulus. The Fed has caused an asset bubble in stocks, preferreds and corporate bonds (and possibly treasuries). The Fed's hope is that fundamentals materialize to justify current asset valuations so it can remove the stimulus without disrupting the markets. The risk is that investors become impatient and begin to sell assets.

Impatience may come from employment data. Much has been made this week about the opinion on Wall Street that the March Nonfarm Payrolls data may indicate that the economy added 300,000 jobs. What is glossed over, but reported, is that the reported jobs gains may be due in large part to the models used and their results generated using post-snowstorm data. NFP is a contrived report using much mathematical smoothing. A better indication of the employment situation may be jobless claims. The following is good summary of Jobless Claims by Bloomberg News:

"Jobless claims remain stubbornly high, pointing to continued slow bleeding for payrolls. Initial jobless claims totaled 462,000 in the March 6 week, about what was expected and driving up the four-week average by 5,000 to 475,500 for the highest level since November when claims first broke below 500,000. There won't be much hope for payroll gains until claims move convincingly below 450,000."

"An emerging negative may be continuing claims where declines have fizzled out. Continuing claims in the Feb. 27 week rose 37,000, marking the fifth increase out of the last eight weeks. The four-week average has stabilized the last two weeks at 4.581 million. The unemployment rate for insured workers is unchanged at 3.5 percent."

"This report was unusually choppy week-to-week during February and unfortunately, in the first week of March at least, has stabilized at uncomfortably high levels. Equities and commodities fell as did the dollar in reaction to today's report."