|
PureBytes Links
Trading Reference Links
|
Following up on my recent thread on bonds, I found an interesting
(excerpt of an) article on theStreet.com relating Bill Gross's views on
Tbonds.
Gwenn
..
At a press conference in Washington, the Treasury Department announced
that next week's auctions will be sized as follows: $12 billion
five-year notes (4 3/4-year, actually -- they're going to reopen, or
add to, the five-year note issued in November), $10 billion 10-year
notes and $10 billion 30-year bonds (30 1/4-year, actually -- the
Treasury hasn't issued a long bond due in May since 1991). The expected
amounts, according to Wrightson Associates, were $15 billion five-year
notes, $12 billion 10-year notes and $10 billion 30-year bonds. The
auctions will take place next Tuesday, Wednesday and Thursday.
The surprise in the announcement was that the other 30-year bond
auction, in August, will become a reopening of the February bond issue,
and that it will be "significantly smaller" than the February issue.
Similarly, two of the four annual five- and 10-year note auctions will
become reopenings of previous auctions, and the reopenings will be
"smaller" than the new issues.
In addition, the Treasury announced that its buyback program will start
within two months, focus on issues that mature in more than 10 years,
and amount to about $1 billion apiece. The buybacks are a debt
reduction measure made possible by the federal budget surplus. They are
an alternative to further reducing the auction schedule, which impairs
market liquidity.
Gross' Thesis In his essay published today, bond guru Gross argues that
two forces will keep the Treasury yield curve inverted -- unless the
stock market crashes. The first, which is well-understood, is the
Treasury Department's planned buyback program. Because federal budget
surpluses have reduced its need to borrow, the Treasury is planning to
buy back $30 billion of its securities from investors this year alone.
Buybacks will shrink the supply of long-dated Treasuries, while demand
for long-dated assets from investors who need them remains constant.
That drives the price of long Treasuries higher and their yields lower.
The second force, Gross says, is the fact that Fed Chairman Alan
Greenspan, by cutting interest rates aggressively after the stock
market crash of 1987, and in response to the market turmoil of the fall
of 1998, "has demonstrated to investors that he will, when required,
lower interest rates and provide emerging liquidity to support the
stock market." This amounts to a free put option for stock investors,
Gross says. Accordingly, stock prices will be higher than they should
be at any given point in time, the economy will be stronger than it
should be and the short-term interest rates controlled by the Fed will
be higher than they would otherwise be. As long as the Treasury is
buying back long-dated paper, only a stock market crash that prompts
the Fed to cut short-term interest rates has the power to un-invert the
yield curve, Gross says.
|