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August 17th, 2012

• Housing Starts Falter but Permits Provide Hope
• Top 5 High Income Short Maturity Investment Grade Bonds
• Gasoline Prices Spike on Lower Supplies
• QE With Jobless Claims Near Post Recession Lows?
• Don’t Believe Everything You Read About Treasuries
Housing Starts Falter but Permits Provide Hope
Posted: 16 Aug 2012 09:00 PM PDT
By Rom Badilla, CFA
August 17, 2012
Economic data released today suggests further signs that the housing recovery is taking shape. Today, US Housing Starts fell 1.1% in July to annualized number of 746,000 homes. The market was disappointed since the median of economists’ forecasts was at 756,000. While the rebound of the housing market halted for now, current underlying trends remain intact it seems.

Housing Starts
Despite the ‘tad’ disappointing display of Housing Starts, Housing Permits show a much brighter side of the future of the housing market. Housing Permits hit a record high of 812,000 homes in four years. In fact, Housing Permits has been rising since the third quarter of last year where figures reached 698,000 homes.

Housing Permits
Behind the revival, less expensive properties and record low mortgage rates are driving consumer demand. As a result, real estate developers and contractors are regaining confidence in demand for housing.
Though it is way too early to say that the market has recovered, the data reflects improvement in sentiment toward the housing market. For the next few months, the resilience of a rising housing market will be tested amid lingering concerns in Europe and slowing growth around the globe, coupled with uncertainty regarding the Fiscal Cliff. All of which could dampen the economy.
In regards to the macroeconomic outlook, this definitely is good news for economic growth and potentially the labor market. Unfortunately for bond bulls, this is a headwind for U.S. Treasuries as evident by today’s activity. The yield on the 10-Year rose to a high of 1.86% in intraday trading. Since then, some buyers emerged to support bond prices which led to the 10-Year closing at a yield of 1.84, an increase of 2 basis points from yesterday.

10-Year Treasury Yield
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Top 5 High Income Short Maturity Investment Grade Bonds
Posted: 16 Aug 2012 09:00 PM PDT
By Rom Badilla, CFA
August 17, 2012
Increase portfolio yields with these Financial Short Maturity Bonds
 Investment Grade Ratings by Standard & Poor’s (AAA through BBB-)
 Maturity is 3 years or less
 These bonds are actively traded in two-sided markets (minimum bid and ask size of $5,000) to ensure liquidity
 ZION 3.5% Matures September 15, 2015 but may be Called at 100 on every September 15 and March 15 starting in 2013 through Maturity. The Yield to Maturity is 3.44%. The Yield to the First Call is 3.26%.
 Remaining bonds are Bullet Structures
 Fixed coupon that pays semi-annually
 U.S. Dollar Denominated
 With 3-Year U.S. Treasuries yielding 0.42%, these bonds on average yield 279 basis points more
Information and quotes provided by Trade Monster’s Bond Trading Center

Break-Evens reflect the yield increase (which leads to a decline in price) required to offset the income earned per year. Break-Evens are calculated by dividing the duration from the yield.
To illustrate, Morgan Stanley 6.00% Coupon Maturing April 28, 2015 can withstand 59 basis points of an instantaneous increase in yield to offset the yield of 3.55% that is earned over the course of one year (3.55% Yield divided by 2.45 Years = 0.59% or 59 basis points).
In other words, if an investor purchased the bond at a yield of 3.55% and yields increased to 4.14% (3.55% + 0.59%), within a year’s time the investor will be flat and will have neither lost or gained. The bond is at the “break-even” level. If the yield increased less, then you will have gained as the income earned was higher than the decline in price. If the yield increased more, then you will have lost more in price than the income earned.
If you believe the Federal Reserve’s stated guidance that short-term interest rates will remain anchored through late 2014 which may be extended to beyond, then interest rates may stay low AND long enough to see these bonds perform.
Remember that as time progresses, income is earned and essentially pocketed while the duration or the price sensitivity diminishes. So any rise in yields will have less effect on the price as the maturity nears.
Break-Evens do not account for loss of principal in the event of default. Monitor credit ratings and perform due-diligence on companies to ensure credit-worthiness.
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Gasoline Prices Spike on Lower Supplies
Posted: 16 Aug 2012 09:00 PM PDT
Walter Kurtz – Sober Look
August 17, 2012
The US consumer can’t catch a break. As if rising food prices weren’t enough – with corn prices at record highs and other food prices expected to move higher next year – we now also have a sharp increase in gasoline prices.
US gasoline inventories have declined more than expected – close to the lower end of the 5-year range.

Source: EIA
And US crude oil stocks also came in below the forecast (though still above the 5-year range).

Source: EIA
That sent gasoline prices sharply higher. NYMEX Futures have now retraced most of the spring 2012 declines.

Gasoline active futures contract (source: Bloomberg)

Bloomberg: – Gasoline futures jumped to a 14-week high on lower inventories, higher demand and rally in Brent crude oil.
Futures gained 2.3 percent as the Energy Department reported gasoline supplies dropped 2.37 million barrels to 203.7 million, the lowest level since the week ended June 15 and the lowest for this time of the year since 2008. Wholesale demand jumped to a 13-month high. Rising Brent prices increased the price of imported crude and gasoline.
“Combine that storage report with the strength in Brent today and you get a 5-cent move,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
Rising food and gasoline prices may materially dampen consumer confidence and push the “headline” CPI number to uncomfortable levels. High fuel costs will also impact the Eurozone, deepening the recession in a number of nations (next post).
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

QE With Jobless Claims Near Post Recession Lows?
Posted: 16 Aug 2012 10:00 AM PDT
By Rom Badilla, CFA
August 16, 2012
Despite slightly more people filing for unemployment benefits for the first time, the current trend should bode well for overall job growth for the U.S. economy. The U.S. Department of Labor released its weekly report on the number of people seeking unemployment benefits which showed a modest increase from the prior week.
For the week ending August 11, Initial Jobless Claims increased to 366,000 individuals which was for the most part in-line with market expectations as evident with the median of economists’ forecasts. The prior week was revised upward slightly by 3,000 more to a total of 364,000 people.
Despite the slight uptick, the four-week moving average fell to 364,000 people which is near the post-recession low.

Initial Jobless Claims 4-Week Moving Average
Initial Jobless Claims is a timely and simple gauge to determine the strength of the job market and the U.S. economy. Fewer people filing for unemployment benefits, suggests that more people are working and have jobs.
Use of the four-week moving average can smooth out the weekly fluctuations which in turn, allows data watchers to understand baseline trends in the job market. An average above 400,000 is associated with job losses for the U.S. economy as has been the case in prior recessions. Conversely, an average below that threshold coincides more with job creation.
The recent trend, barring a major surprise in next week’s Claims number, should lead to a modest improvement in next month’s Non Farm Payrolls data release which is scheduled to be revealed on September 7. This should provide the Federal Reserve another data point to factor into their decision to embark or not on another round of Quantitative Easing. Given the recent string of modestly improving economic data, it appears that QE is not in the cards at their next meeting slated for mid-September.
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Don’t Believe Everything You Read About Treasuries
Posted: 16 Aug 2012 08:00 AM PDT
By The Financial Lexicon – Seeking Alpha
August 16, 2012
On Wednesday, under the “Top News” section of Seeking Alpha’s homepage was the headline, “Losses come quick for Treasury investors.” Upon clicking on the headline, investors were brought to a brief paragraph mentioning the recent rise in the 10-year Treasury (IEF) that then claimed that a further 50 basis point rise in yield would result in a 6.78% loss in principal. The 6.78% loss figure came from a tweet by a corporate CIO. For those investors interested in reading the tweet, click here.
Before continuing on, let me state clearly that I do not think Treasuries (TLT) are a buy at these yields. I can think of plenty of other things I’d rather do with new money ready to be invested in the markets than purchase a 10-year Treasury yielding 1.809% on a non-taxable-equivalent yield basis. For those investors confused about why I noted that the 1.809% yield is on a non-taxable-equivalent yield basis, you may find my article, “One Thing You Might Not Know About Treasuries,” informative.
Just because I wouldn’t put new money to work at these levels doesn’t mean I’m not interested in the truth. Therefore, I’d like to provide investors with a more complete and accurate examination of what would happen if there were a further 50 basis point rise in the 10-year Treasury note maturing 8/15/2022, CUSIP 912828TJ9.
To read the article in its entirety, click here.

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