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August  22nd, 2012

• U.S. Treasuries Tank After Growth Surprises Higher
• Corporate Bonds Outperform Treasuries But Prices Still Decline
• A Welcome Surprise from GDP Figures
• Swiss Base Money Spikes as SNB Defends Peg
• Emerging Markets to Continue Dominance Over Developed Markets
U.S. Treasuries Tank After Growth Surprises Higher
Posted: 27 Jul 2012 02:00 PM PDT
By Bondsquawk
July 27, 2012
Positive U.S. growth figures coupled with Draghi’s encouraging comments from yesterday strengthened hopes of averting a U.S. slowdown and escalation of the European Debt Crisis. GDP figures came in at 1.5% which beat market expectations of 1.4%. This uptick follows an upward revision to the previous quarter by 0.1% to 2.0%. Also, the Core Personal Consumption Expenditure Deflator which is the Fed’s gauge for inflation was up 1.8% in the quarter, following a 2.2% increase previously. These latest figures released by the U.S. Department of Commerce built optimism for growth for the second half of the year.
People’s attitudes toward spending are improving according to the University of Michigan. The Consumer Sentiment Index was at 72.3 and thus beat its market expectations of 72.
Fueled by Draghi’s comments from yesterday which may lead to ECB action next week, yields on sovereign bonds continued to subside. The yield on Spain’s 10-Year benchmark note fell 9 basis points to 6.74% which follows yesterday’s massive tightening of 46 basis points.
In addition, the yield on short-term rates declined even more today as the 2-Year fell 38 basis points to 5.30%. This places the yield differential between the 2 and 10-Year at 144 basis points and well into positive territory as an upward sloping yield curve.
As noted before, a flat or inverted yield curve typically signals funding and solvency duress as short-term borrowing costs rise higher relative to yields on the longer end. A curve of this shape coupled with rising overall yields spells trouble for sovereigns (specifically a country that does not issue its own currency) as they have trouble accessing the capital markets for funding.
In similar fashion, yields on Italian 10-Year bonds finished the roller-coaster ride of a week by closing at 5.96% which is a decline of 10 basis points.
Today’s action eases funding pressures for Spain that needs to access the capital markets as it continues to face rising budget deficits and bond redemptions later this year.
In addition, these positive developments built confidence among investors leading to an outflow from safe haven securities and into assets with higher returns. As a result, yields on the 10-Yr U.S. Treasury spiked 11 basis points and ended at 1.54%. The Long Bond ended the week at 2.62% with an increase in yields of 12 basis points. The 5-Yr Treasury was up 6 basis points and finished the day at 0.65%. The 2-Yr increased a basis point to 0.24%.
The economic news and data had the same effects in the Corporate Bond sector as most bonds in the Financial and Industrial sector fell in dollar price despite yields declining less than their U.S. Treasury counterparts.
Bonds issued by Bank of America, Barclays, Citigroup and JP Morgan declined in price as yields increased on the day. Despite this, there were some gainers in the Financial Sector as Goldman Sachs and Morgan Stanley saw their long-term bond yields decline by 8 and 9 basis points respectively.
In the Industrial Sector, the situation remained the same with most bonds in the red. Cisco systems had an increase of 16 basis points whereas Google and Walmart had an increase of 13 and 12 basis points respectively. Microsoft and Intel each had an increase of the 11 basis points.
For further details, check out today’s Corporate Bond Snapshot.

If you have any questions or feedback on anything regarding the economy, markets, and bonds, feel free to Contact Us. We would be delighted to respond.
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.

Corporate Bonds Outperform Treasuries But Prices Still Decline
Posted: 27 Jul 2012 02:00 PM PDT
By Bondsquawk
July 27, 2012
Economic news and data led to outflows across the fixed income asset class as bonds in the Financial and Industrial sector fell in dollar price despite yields declining less than their U.S. Treasury counterparts.
Bonds issued by Bank of America, Barclays, Citigroup and JP Morgan declined in price as yields increased on the day. Despite this, there were some gainers in the Financial Sector as Goldman Sachs and Morgan Stanley saw their long-term bond yields decline by 8 and 9 basis points respectively.
In the Industrial Sector, the situation remained the same with most bonds in the red. Cisco systems had an increase of 16 basis points whereas Google and Walmart had an increase of 13 and 12 basis points respectively. Microsoft and Intel each had an increase of the 11 basis points.
Information Provided by Trade Monster’s Bond Trading Center

If you have any questions or feedback on anything regarding the economy, markets, and bonds, feel free to Contact Us. We would be delighted to respond.
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.

A Welcome Surprise from GDP Figures
Posted: 27 Jul 2012 11:00 AM PDT
By Bondsquawk
July 27, 2012
Q2 real GDP increased by 1.5% and was largely paced by consumption. According to Deutsche Bank’s Global Markets Research, it was encouraging to know that consumption increased by 1.5% and was driven by continued gains in services (up 1.9%) which have been really weak till now.
Residential investment continues to produce solid increases, albeit off of a depressed level —spending was up 9.7% following a 20.5% increase in the previous quarter. Equipment and software spending rose 7.2%, and structures eked out a slight gain (+0.9%). Inventory building totaled $66 billion, about $16 billion more than what we had anticipated. This accounted for most of our forecast miss, as net exports widened (-$424 billion vs. -$416 billion) and government outlays (-1.4%) remained depressed, both of which were in line with our expectations. Final sales were up 1.2%, little different than our +1.3% estimate, and more importantly, final sales to private domestic purchasers —GDP less inventories, net exports and government spending—rose 3.0% in the quarter, 0.7% faster than what we had expected.
The increase in domestic demand indicates that inventory building will not hinder the GDP growth and thus the second half growth forecast remains the same.
From Q1 2011 to Q1 2012, real GDP growth was revised up 0.5% to 2.5%. The upshot is that the economy has been a little healthier over the past year relative to what had been previously reported.
The core Personal Consumption Expenditure deflator which is the Fed’s gauge for inflation was up 1.8% in the quarter, following a +2.3% increase previously.

If you have any questions or feedback on anything regarding the economy, markets, and bonds, feel free to Contact Us. We would be delighted to respond.
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.

Swiss Base Money Spikes as SNB Defends Peg
Posted: 27 Jul 2012 09:00 AM PDT
By Walter Kurtz – Sober Look
July 27, 2012
The Swiss National Bank (SNB) continues to “print” Swiss francs (CHF) in response to the flow of capital out of the Eurozone. As Eurozone residents exchange euros for CHF, the SNB buys these euros and sells (the newly “printed”) francs to maintain the 1.2 CHF to EUR peg. As a result Switzerland’s monetary base has spiked to record (CHF 274bn).

Swiss base money (CHF MM)
But Switzerland can afford to explode its monetary base for now because the broad money supply (M3) has been growing at 7.4% YoY (within the range of the last 4 years) and inflation has been negative. In fact this the situation looks deflationary given that core inflation is at record lows
GS: – “… despite moderate economic growth, the deflation risk for Switzerland is non-negligible. With the starting point of inflation already so low, a deterioration in the external environment could easily push the Swiss economy into recession, putting further downward pressure on prices.

Switzerland CPI (white) and core inflation (green)
That’s why the SNB will vigorously defend the 1.2 peg for the foreseeable future and base money will continue to grow. In fact given the Swiss franc’s appreciation in the past few years (up 36% since 2008), some are saying CHF is significantly overvalued and the peg should be greater than 1.2.

CHF per 1 euro (Swiss franc has strengthened by 36% since 2008)
Bloomberg: – The Swiss currency remains 36 percent overvalued against the euro, based on purchasing power parity as calculated by the Organization for Economic Cooperation and Development. That compares with 24 percent for Denmark’s krone.

If you have any questions or feedback on anything regarding the economy, markets, and bonds, feel free to Contact Us. We would be delighted to respond.
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.

Emerging Markets to Continue Dominance Over Developed Markets
Posted: 27 Jul 2012 05:00 AM PDT
By Bondsquawk
July 27,2012
According to JP Morgan’s report Emerging Markets of Eastern Europe, Middle East and Africa (EMEA) are likely to continue to outperform the developed markets because of better fiscal and debt metrics.
J.P. Morgan’s 2012 and 2013 GDP forecasts are respectively: Global, 2.4% and 2.8%; USA, 1.9% and 1.9%; Japan, 2.6% and 1.2%; Euro area, -0.4% and 0.2%; developed markets (DM), 1.2% and 1.3%; and emerging markets (EM), 4.7% and 5.3%.

Some of the reasons for this thesis pointed out by the report is a slowdown in jobs growth, consumer spending, and manufacturing activity coupled with high borrowing costs of Spain, Italy and other weak Euro area countries. In addition, Euro-area manufacturing and consumer confidence levels are well below expectations.
However, EMEA and other emerging markets are likely to perform below potential due to the global slowdown.

JP Morgan pointed out that the global slowdown and supply-side shocks due to uncertainty and threats from Iran have led to volatility in Oil prices. Moving forward, production levels the Gulf Trio should be able to maintain OPEC’s target of 30 mbd with a few minor hiccups.

Spike in oil prices because of supply-side shocks could adversely affect the growth of these emerging markets.

In addition, the report also indicated that the banking sector remains vulnerable in the EMEA EA region and could be a matter of concern.
In 2Q12 funding withdrawals of western banks picked up again, although not to the pace of 2H11. With the ECB’s 3-year LTRO’s easing liquidity strains for western European banking groups, withdrawals from CESEE declined to 0.2% of GDP in 1Q12.Funding withdrawals were largest in 3Q11 and 4Q11 (0.7% and 0.4% of GDP, respectively).Some progress has been made in bringing down loan-to-deposit ratios, which now stand at 103% on average compared to 115% in 2008. Ukraine has by far the highest LTD ratio in the region.

If you have any questions or feedback on anything regarding the economy, markets, and bonds, feel free to Contact Us. We would be delighted to respond.
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.

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