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Bonds Still Have Legs – US-FOREX.US

Forex-Publisher — Tue, 18 Aug 2009 22:59:52 +0000

All types of bonds have soared this year, from the debt of speculative-grade companies to the bonds cities and states sell to pay for schools. You might think that, the 38% return so far this year for junk bonds would mark the end of a run. But to Robert Tipp, chief investment strategist for Prudential Fixed Income Management, nearly all varieties of bonds still hold promise, even Treasurys. “We’ve come back a lot,” Tipp said, “but there’s still a long way to go.”At a gathering of Prudential’s
investment managers on Tuesday, Tipp and others discussed their outlook for the economy. All agreed that the worst had passed. “The Great Recession is over,” declared Edward Keon, a portfolio manager for Quantitative Management Associates. Another point of agreement: When economic growth returns, it will likely set a slow pace, so the investment managers expect the Federal Reserve to keep a lid on interest rates for the near future. “There’s no risk of the Fed taking away the punch bowl soon,” Tipp said. That means investments in corporate and municipal bonds should continue to perform well. Low interest rates, for instance, make it easier for companies and municipalities to refinance debt and avoid default.
One bond fund managed by Prudential, the Dryden Total Return Bond Fund, includes a mix of mortgage-backed, corporate and government bonds. As of its most recent regulatory filing, it owned debt from Goldman Sachs
, Bank of America
and JP Morgan Chase
at the end of April. Thirty-year bonds from Freddie Mac are its largest holding.
Tipp believes corporate debt hasn’t completely recovered from the sell-off that followed Lehman Brothers’ bankruptcy, when bond prices seemed to forecast another Great Depression. The average junk bond currently pays 9 percentage points over comparable Treasurys, a spread Tipp expects to fall. Before that spread dropped below 10% in July the entire junk bond market appeared “distressed” – usually a sign of a company’s impending collapse .
While inflation fears and looming bond sales keep some from buying Treasury debt, Tipp sees value in the long 30-year bond, which currently pays 4.35%. If the recession lasts longer, such safe haven securities may start climbing again. On the other hand, if the economy rebounds and the Fed raises rates, longer-dated Treasury bonds would be the least vulnerable. He’s avoiding shorter-dated Treasurys, which could get crushed if the Fed raises rates.

Bernankes Image Tour – US-FOREX.US

Forex-Publisher — Mon, 27 Jul 2009 19:49:38 +0000

Federal Reserve chairman Ben Bernanke has hit the road, taping a “town-hall-style” special on public television that will air over three days this week. Discussing the economic recovery and defending the central bank’s actions before a general audience accomplishes a number of things. Aside from raising public awareness, reaching out to citizens also boosts the profile and credibility of the central bank and its chairman as Congress seeks to revamp the nation’s regulatory structure, and Bernanke readies for reappointment in January when his term expires.On his trip to the so-called American heartland, Bernanke talked about the economy, explained the central bank’s actions, as well as attempted to demystify the institution, before a more than 100 citizens from Kansas City area. “I think he clearly wants to get more public support for the Fed,” said Mike Feroli, senior economist at JPMorgan Chase. “Whether that’s for his own purposes to be renominated or for the purposes of the Fed as an institution is more open to question.”The meeting, which will be aired on The News Hour and moderated by its anchor Jim Lehrer, comes at a time when the government is revamping its regulatory structure, leading the heads of government agencies to jockey for greater influence and responsibility. In particular, regulatory proposals have surfaced that would expand the powers of the central bank. The chairman has given numerous nationally televised speeches at conferences and lunches, followed by a question and answer session from the audience. Only now instead of bankers and economists, Bernanke will be speaking before average citizens. And unlike members of Wall Street, the Fed actions such as bank bailouts are much less popular with the general public. Unlike Wall Street, the general public traditionally hasn’t been interested in the central bank’s view on interest rates, but these aren’t typical times. Aside from public frustration with the Fed’s actions, Americans are also worried about the economy, as the unemployment rate increases, credit remains tight, and personal wealth continues to evaporate. The meeting is also consistent with Bernanke’s advocacy of greater openness and transparency, distinguishing himself from his predecessor Alan Greenspan. Unlike Greenspan, whose public statements were notorious for being deliberately opaque and convoluted, Bernanke’s speeches have been marked by their clarity. Bernanke’s leadership style is also fundamentally different from Greenspan’s. Whereas Greenspan placed himself first, and was interested in officials to follow, Bernanke has sought a more collective approach to monetary policy.
In excerpts already released on PBS’ Web site, Bernanke exhibited a defiant tone to the central bank’s actions. “I was not going to be the Federal Reserve chairman who presided over the second Great Depression,” Bernanke said. This attitude was exhibited last month during a congressional hearing during which the chairman defended his actions regarding Bank of America’s acquisition of Merrill Lynch. It wasn’t always like this. In the early parts of the financial crisis, Bernanke was inundated with criticism from all directions, and lack of confidence from Wall Street. As the dust has settled though, his actions, at least on a whole, appear to have been vindicated.

How Ben Will Free The Banks – US-FOREX.US

Forex-Publisher — Wed, 22 Jul 2009 19:45:57 +0000

Federal Reserve Chairman Ben Bernanke has tended to the largest banks in the U.S. the way a park ranger deals with an endangered species. He caught them, took them in and nursed them back to health. Now he has to release them back into the wild. He’s hoping for an easy transition.There are more than a dozen different programs established by the Fed and Treasury Department to confront the crisis in the banking industry, and there is no one way the government plans on working out of them. Yet, the government isn’t interested in making abrupt movements, which would disrupt the still fragile sector. For example, the Fed and the Treasury have made banks less willing to use the Temporary Liquidity Guarantee Program by indicating that firms will be more highly regarded if they issue debt that isn’t guaranteed through the program. The method appears to be working. Though the program is still in effect, there has been a greater hesitancy to use it.Banks like Citigroup
, Wells Fargo
and Bank of America
flocked to these programs during the financial crisis, even though some claimed at the time that it wasn’t entirely necessary – now the banks are being weaned off. Brokerage firms such as Goldman Sachs
and Morgan Stanley
went so far as to change their status to a “bank-holding company” to ensure their eligibility. General Electric
‘s financial arm GE Capital was granted exemption, and actually became the largest recipient of the TLGP program, though was not given additional oversight. When the Fed does finally release the banks, investors should focus on credit quality first and then earnings. Most of the Fed’s actions have been credit-centric, after all. Banks with the most credit risk on their balance sheets will have the most difficult time adjusting as the Fed returns to normalcy.Bernanke’s semi-annual monetary policy report to Congress was atypical. The minutes from the June Federal Open Market Committee meeting were released beforehand, and the chairman beat committee members to a discussion on an “exit strategy” as well by publishing an op-ed on the matter in the Wall Street Journal.
Bernanke stressed that the central bank’s extraordinary measures will remain in place for the foreseeable future. Though, when the time comes, the exit strategy will focus on the Fed’s balance sheet, which has grown to massive proportions. The primary tool used be interest on reserves. Bernanke also mentioned a number of measures to reduce the level of reserve balances, including draining reserves through reverse repos. The Fed could also offer term deposits on banks, said Mike Feroli, a senior economist at JPMorgan Chase, which would function like certificates of deposits do for retail savers.Bernanke avoided discussion of the federal-funds rate, as well as whether the Fed would extend its Treasury purchase program when the 300 billion of purchases is completed in September. Joe LaVorgna, chief U.S. economist at Deutsche Bank, believes the Fed will not raise the federal funds rate until unemployment begins to substantially decrease, adding that before that happens, the balance sheet will be in “runoff mode”.

Bonds Aim For The Middle- US-FOREX.US

Forex-Publisher — Tue, 07 Jul 2009 21:46:08 +0000

With the Federal Reserve keeping interest rates at record lows, inflation is bound to be a problem, says Paul Lefurgey, Madison Investment Advisor’s lead fixed-income manager. But it’s not an immediate one: Bond markets currently project prices to rise 1.5%.Taking a nuanced view leads Lefurgey to walk a middle ground. Madison manages 8 billion for institutions and retail investors, including the Mosaic mutual funds. He’s not keen on longer-dated Treasury bonds, which seem sure to drop as inflation expectations grow, or short-term Treasury bills that pay next to nothing. He thinks the yield curve, the difference between short- and long-term interest rates, will grow steeper. As a result, most of Madison’s bonds mature in three to seven years. “When the yield curve is steep, it’s better to be intermediate than long or short,” Lefurgey says. A flood of Treasury paper to finance deficits, weakening demand from foreign buyers and inflation worries will continue to push 10-year Treasury bonds higher, he says. Eventually, when businesses begin spending again and inflation starts to creep into the economy, the Fed will be hesitant to raise short-term rates and stifle a recovery. A steep yield curve, after all, is a boon to banks that borrow short and lend long. Janet Yellen, president of the Federal Reserve Bank of San Francisco, recently said the federal funds rate could remain around 0% for years. In a speech before the Commonwealth Club of California, she said falling prices, not inflation, remains a threat to the economy; Yellen has a say on the federal funds rate as a member of the Fed’s Open Market Committee. Over the next six months, Lefurgey sees the yield on the 10-year Treasury hovering between 3.25% to 4.25%. On Tuesday, the benchmark bond traded at 3.46%. Lefurgey calls a 10-year yield of 5.5% “fair value.”Earlier this year, Lefurgey began selling off some Treasury holdings in favor of investment-grade corporate bonds. “The easy money has been made there,” he says. But one move he still finds attractive is buying banks’ senior-ranked debt. “The Treasury and Fed have already showed us that some banks are too big too fail,” he says. Troubled Citigroup
and Bank of America
can probably rely on the government to back them up. If the government actually lets a bank fail, then Lefurgey thinks lower-ranked subordinated debt holders would suffer before senior-level creditors.

Dour Fed Chatter – US-FOREX.US

Forex-Publisher — Thu, 02 Jul 2009 18:46:02 +0000

Recent talk from Federal Reserve officials goes to show that you really get to know a person once they leave the office.Over the past week a handful of speeches have, in many ways, offered more insight into the thinking of the central bank than last week’s statement following Federal Open Market Committee’s meeting. Earlier this week, San Francisco Fed President Janet Yellen said there is no real threat of an inflation surge, and is instead expecting inflation to fall to about 1% in the next year. Not only that, she believes the greater risk is inflation remaining too low, rather than too high over the next several years, implying a sluggish economy far into the future. Her commentary flies in the face of numerous Wall Street analysts, who have argued that the government’s massive liquidity injections will result in heightened prices as soon as economic activity picks up.Yellen appears to believe the economy is too weak for that to happen. For example, she said several years are needed before the return to full employment levels, adding that she’d be happy to see the jobless rate fall to 6% in the next few years, according to TradeTheNews.com. Yellen noted that the new “natural rate” of unemployment is between 5% and 5.5%, and that the high jobless rate means the Fed must use “every bullet” in its arsenal.Yellen’s dour labor expectations affect the entire economy, particularly the consumer discretionary sector, which include apparel retailers like Urban Outfitters
and luxury goods companies like Tiffany
, as well as tourism operations like Host Hotels & Resorts
Walt Disney
, and Time Warner Cable
.
Yellen said it’s conceivable that rates could remain near zero for several years. Harkening back to the central bank’s poor timing in 1936, she’s more concerned policymakers will prematurely tighten rates and undercut the recovery. Low short-term rates will also make life rough for investors. In a near 0% interest environment, investors will need to take more risk to garner higher returns, or they’ll have to temper expectations. It’s unlikely that the stock market can keep up a 9%-a-year average return in a low-rate environment.”The general thrust of Yellen’s remarks was not unusual, given that she is one of the committee’s more dovish members,” said Michael Feroli, a senior economist at JPMorgan Chase. “Though, to be sure, even by her standards some of the remarks were very dovish.”Yellen has found unexpected company in the more hawkish St. Louis Fed President James Bullard, though. In his speech, Bullard said that the FOMC’s comments on rates is dependent on both inflation and economic developments, but with a twist.”Should economic performance improve and inflation begin to rise, the promise is to maintain zero rates longer than might be expected by simple rules of thumb,” Bullard said. “This is important for markets to understand.” Those “rules of thumb” are presumably Taylor-like rules, which Feroli had observed do not call for higher rates for several quarters. Bullard aside, discussing pressuring rates longer than expected is atypical for someone in his position. “While this idea is not uncommon in academic discussions, this is the first time it has been mentioned by a Fed policymaker in this episode,” Feroli said.Responding to concerns about the Fed’s balance sheet, Bullard said the central bank’s exit strategy is “unclear”. He views the sale of assets as an appropriate tool to manage the balance sheet. For now though, he said the Fed will focus on the purchases of assets, adding that he expects some liquidity programs to remain in place until next year.”The main takeaway is that relative to other Fed speakers, he placed much more emphasis on asset sales as central to the exit strategy,” Feroli said.

Bernanke Has No Regrets – US-FOREX.US

Forex-Publisher — Thu, 25 Jun 2009 17:46:24 +0000

It’s not easy being Ben. Did he threaten Lewis? Why didn’t he oversee Bank of America more closely? Why didn’t the government disclose its assistance? Is the Federal Reserve manipulating the housing market with Blackrock? On Thursday Fed chairman Ben Bernanke held his ground against the skeptical congressional committee that has been holding weeks of hearings about the financial crisis and various bailouts and handouts earlier this year). Bernanke insisted that his actions regarding Bank of America
‘s acquisition of Merrill Lynch were both appropriate and legal. He and officers of the Federal Reserve have been accused of forcing the deal through at great cost to taxpayers who had to put up 20 billion at the close and to BofA shareholders.”It was a successful transaction, it helped stabilize the financial markets, and it was good for taxpayers, I have no regrets,” Bernanke said.Akin to the testimony of BofA chief executive Ken Lewis, the committee members were left frustrated by the conflicting characterizations of the deal. Despite numerous internal documents and sworn statements that suggest otherwise, Bernanke insisted that he did not threaten, or tell anyone to threaten, Lewis’ job in order to keep him from invoking a “material adverse conditions” clause that would have allowed him to back out of BofA’s purchase of Merrill. Bernanke said only that he had expressed concern at the prospect that Lewis might walk away from the table.Bernanke noted that the Fed had to keep Lewis in the deal because if he had backed out, the Fed and the government wouldn’t have been able to do anything about it. The only action the government could have taken would have been to accuse Lewis of breaching his fiduciary duty to his own shareholders, a charge that would have been hard to make, particularly if BofA’s stock price had risen, as it likely would have given the magnitude of Merrill losses that BofA had to absorb.Most of the questions were about whether or not former Treasury Secretary Hank Paulson and Bernanke threatened Lewis, though Representative Dennis Kucinich took another line, arguing that Bernanke and other government officials did not provide enough oversight of BofA. “Our investigation reveals that what is remarkable is what the government did not do,” Kucinich said.
Bernanke seems to have ceded this point, at least in general. In subsequent questioning, hesaid that if the government had the legal channels to save Lehman Brothers
, it would have but that the real answer is to insulate the market from banks that are “too big to fail”. “We believe there have to measures that allow these institutions to fail when appropriate while not creating systemic risk to the financial system,” Bernanke said, “including greater oversight of capital and supervision of companies.”

Stocks Surge Across Asia – US-FOREX.US

Forex-Publisher — Thu, 25 Jun 2009 10:46:11 +0000

HONG KONG -
Merger news in Japan and a weaker yen boosted the Nikkei benchmark to gain the most in more than a month. Seoul shares also climbed over 2% after the government said the South Korean economy would not shrink as much as its initially forecast. South Korean Finance Minister Yoon Jeung-hyun said on Thursday that there were signs of improvement in Asia’s fourth largest economy. The Seoul government now predicts the South Korean economy will contract 1.5% this year, better than the previous projection of a 2% decline.The revision reflected that massive government stimulus measures were taking into effect. The government estimated the economy will improve further in 2010, with a 4% growth in GDP. Seoul’s Kospi Index closed up 2.1% to 1,392.73. In Tokyo, Japanese manufacturers climbed on a weaker yen, which traded against the U.S. greenback at 96.41 in Asia on Thursday, down from 95.66. The dollar rose after the U.S. central bank decided to hold its benchmark overnight rates in a range between zero to 0.25%. The dollar rose for the second day after the Open Market Committee of the Fed said Wednesday that it would not increase its purchase of bonds in an attempt to further prop up the U.S. economy.Japanese exporters rose on the depreciated yen, boosting the Nikkei 225 Index up 2.2% to close Thursday at 9,796.08. Honda Motor
and Toyota Motor
added 2.3% and 3.9%, respectively, even though both automakers reported poor sales performance in May.
Honda Motor announced Thursday that its exports fell for the eight straight month in May, plummeting 65.2% on a yearly basis to 18,156 units. Domestic sales also declined over 6% to 37,525 units. Likewise, Toyota Motor announced on the same day that its export sales toppled 51.3% to 100,117 units in May, while sales at home lost 23.1% to 82,394 units, both making for the 10th consecutive decline.
Mitsubishi Electric Corp
rocketed 7.7% to 613 yen after Nikkei reported the company planned to build factories in the U.S. and in Europe next year to produce solar power generation systems using solar cells shipped from Japan. The new plant in Europe would quickly boost the annual production capacity of Mitsubishi Electric Corp to 100,000 kilowatts, the newspaper added. Aozora Bank rose 10.8% to 154 yen after the ailing bank said it was in talks with another money-losing lender Shinsei Bank for a possible merger next year. Shinsei shares jumped 11.0% to 161 yen . Hong Kong shares opened up 1.4% on Thursday, and the Hang Seng Index traded 2.1% higher at 18,275.03.China’s second largest oil company China Petroleum & Chemical Corp
, commonly known as Sinopec, rose 0.4% to 5.61 Hong Kong dollars after it agreed to pay 7.2 billion in cash to buy the Toronto and London listed Addax Petroleum Corp in a deal to obtain huge oil reserves in Iraq’s Kurdistan and West Africa. Australia’s S&P/ASX200 rose 1.3% to 3,856.00 after the International Monetary Fund has revised its Australia’s economic growth forecasts to negative 0.5% this year, up from its initial estimate of negative 1.4%.
Thomson Financial contributed to this article.

Asian Stocks Surge – US-FOREX.US

Forex-Publisher — Thu, 25 Jun 2009 05:46:08 +0000

HONG KONG -
Even though the U.S. Federal Reserve overnight concluded its two-day interest rate meeting with a cautious tone, Asian stocks surged across the board on Thursday. Japanese manufacturers climbed on a weaker yen and overseas expansion, while Australian investors were happy to see the International Monetary Fund has revised up its economic forecast on the Aussie economy. The yen weakened against the U.S. greenback, hitting 96.22 in Asia on Thursday, down from 95.66. The dollar rose after the U.S. central bank decided to hold its benchmark overnight rates in a range between zero to 0.25%. The dollar rose for the second day after the Open Market Committee of the Fed said Wednesday that it would not increase its purchase of bonds in an attempt to further prop up U.S. economy. Japanese exporters rose on the depreciated yen, boosting the Nikkei 225 Index up 1.6% to 9,741.87 after midday. Honda Motor
and Toyota Motor
added 3.1% and 1.9%, respectively, even though both automakers reported poor sales performance in May. Honda Motor announced Thursday that its exports fell for the eight straight month in May, plummeting 65.2% on a yearly basis to 18,156 units. Domestic sales also declined over 6% to 37,525 units. Likewise, Toyota Motor announced on the same day that its export sales toppled 51.3% to 100,117 units in May, while sales at home lost 23.1% to 82,394 units, both making for the 10th consecutive decline.
Mitsubishi Electric Corp
rocketed 7.4% to 611 yen after Nikkei reported the company planned to build factories in the U.S. and in Europe next year to produce solar power generation systems using solar cells shipped from Japan. The new plant in Europe would quickly boost the annual production capacity of Mitsubishi Electric Corp to 100,000 kilowatts, the newspaper added.
Aozora Bank rose 9.4% to 152 yen after the ailing bank said is in talks with another money-losing lender Shinsei Bank for a possible merger next year. Shinsei shares jumped 8.3% to 157 yen . Hong Kong shares opened up 1.4% on Thursday, and the Hang Seng Index traded higher 1.9% at 18,224.06 before the midday bell. China’s second largest oil company China Petroleum & Chemical Corp
, commonly known as Sinopec, rose 0.7% to 5.63 Hong Kong dollars after it agreed to pay 7.2 billion in cash to buy the Toronto and London listed Addax Petroleum Corp in a deal to obtain huge oil reserves in Iraq’s Kurdistan and West Africa. Australia’s S&P/ASX200 rose 1.1% to 3,847.20 after the International Monetary Fund has revised its Australia’s economic growth forecasts to negative 0.5% this year, up from its initial estimate of negative 1.4%.
Thomson Financial contributed to this article.