FED made the historical cut last night and drove DJI, S&P500, and NASDAQ up by 4.20%, 5.14% and 5.41% respectively.
Nevertheless, anyone who had paid attention on the T-bill yields and FED funds rate for the recent 3 weeks would not be surprised by the cut for the de-facto FED rate had been between 0.12% and the lowest -0.012%.
LIBOR have also been driven down to 88pts (3month) and 185pts (6month) respectively. 3month T-bill yield rate is 6pts. TED hence has narrowed down to 2-digit: a difference of 82pts.
Long-term finance rates have dropped but the risk premium has remained outstanding by far: 516pts (5 year) and 592pts (10 year) respectively. It echoes by the corporate bond market in which investment grade and junk grade bond yield rate are 7.22% and 22.49% respectively. Comparing with the figures with last month, the 75pts cut have not exerted the same effects on corporate bond markets. It means the worries on the survival of corporates have not passed yet.Such lack of confidence on corporate survival, convoluted with the competition by treasuries markets, makes the last night rally as prescribing a dying patient cocaine as placebo. Had the economic conditions not changed and FED continued to supply money through manipulating bond price expectation, the stock market eventually will subject to a big adjustment after the rally.
Wednesday, December 17, 2008
Monday, December 15, 2008
Negative Interest Rate
Fed Funds rate has dropped by 0.12% to -0.06%.
Spread between TIPS and T-notes are as follows:
5-year: -21pts
10-year: 17pts
30-year: 74pts
TED spread is 191pts.
If we take the actual FED funds rate as reference, then the 5-year and 10-year AAA banking and finance rate risk premium, together with mortgage spread rate, has not decreased.
In other words, FED is supplying money for banks to polish their balance sheets but the money cannot leave the banking system. Alienating the yield rate of treasuries cannot cover the actual lack of good investment projects, except the ones that are not related to daily demand and supplies.
Spread between TIPS and T-notes are as follows:
5-year: -21pts
10-year: 17pts
30-year: 74pts
TED spread is 191pts.
If we take the actual FED funds rate as reference, then the 5-year and 10-year AAA banking and finance rate risk premium, together with mortgage spread rate, has not decreased.
In other words, FED is supplying money for banks to polish their balance sheets but the money cannot leave the banking system. Alienating the yield rate of treasuries cannot cover the actual lack of good investment projects, except the ones that are not related to daily demand and supplies.
Wednesday, December 10, 2008
The Effect of Zero Interest Rate
By manipulating the short-term bond rate and hence rise the bond price, the actual FED funds rate is close to zero. Now the effect has been shown, coupling with so-called good new s like stimuli and bailout plans. However, the mortgage rate and finance rate, if compare to the actual rate, are still at high risk premium. Despite the decrease on price of longer term bond, bond market has not really collapsed. Besides, TED spread also shows that the deflation expectation within 5 year is still valid. Considering the rather small volume of DJI, HSI, and even Shanghai indexes, the HSI currently is subject to a rebound due to an influx of money, possibly from China and from other overseas money retreated from China market.
With the short-term influx and the mid-term dim expectation, the rebound may not stand long. Events like prolonged deflation, jobs cut, other firms collapses, or at least unfavorable 2008Q4, 2009Q1, or 2009Q2 results can trigger the end of rebound. During this period, either hold cash until the period is clearer or speculate on the ups and downs of the equity market. Gold worths attention when demand on gold will rise due to huge supplies and high velocity of USD in the market, through not only government pumping but also welfare policies (if any).
With the short-term influx and the mid-term dim expectation, the rebound may not stand long. Events like prolonged deflation, jobs cut, other firms collapses, or at least unfavorable 2008Q4, 2009Q1, or 2009Q2 results can trigger the end of rebound. During this period, either hold cash until the period is clearer or speculate on the ups and downs of the equity market. Gold worths attention when demand on gold will rise due to huge supplies and high velocity of USD in the market, through not only government pumping but also welfare policies (if any).
Saturday, December 6, 2008
公司債卷或有可為
在現時股、樓、匯、金、商品和衍生工具都閹悶的情況下，債市或許是有投資價值的市場。如果嫌政府債卷的回報太低，則可以考慮風險較高的公司債卷。公司既難以從股本市場集資，而銀行又為了避險而不願融資下，發債是一個可行的途徑。由銀行的角度來看，他們也樂意為上市公司發債包銷。一來公司可以繼續營運，銀行繼續保有客戶。二來銀行的舊有借給企業的貸款的信貸風險由一眾債卷持有人共同承擔，甚至公司借來的錢可以直接還給銀行，間接減低銀行的壞賬。三來銀行不願放債就等於沒有利息收入，在只有少量上市生意下，幫公司發債又是一門生意。既有費用收，又可以減低自身風險，何樂而不為呢？在這種情況下，買賣雙方都有越來越多人進場，也就是說投資者也因而多了選擇，這對有興趣投資債市的人來說是好消息。
Friday, December 5, 2008
FED Funds Rate 0.06% - Historical Low since 1954 Record
Before the actual announcement from FED have happened, market has already responded to the expectation on zero interest rate. FED funds rate hit a record low of 0.06% ever since 1954.
3-month and 6-month T-bill yield rate lowered to 0.01% and 0.25% respectively. 12-month T-bill yield rate was only 0.57%.
Even longer term note and bond yield have decreased. Market is lust for shelter as well as potential for some speculation. Exit period of the bonds issued may come before the offical decrease of interest rate ceases at 0%, and government starts to issue higher yield bond to fund its stimuli plan. Yet, after issuance, any wave of speculation may increase. Companies that can be benefited from the stimuli plan may find their corporate bonds issued now may rise in the price during that period.
Another observation is that the T-note/bond-TIPS spread has turned around from deflation expectation to inflation expectation: 5 year inflation expectation is 0.14% and 10 year is 0.59%. Yet, both are small in magnitude.
Despite the expectation of huge money supply, the market does not expect a real inflation will go ahead. Depending on the scale of stimuli, raw materials prices may subject to a rebound due to USD depreciation and demand from infrastructural projects.
3-month and 6-month T-bill yield rate lowered to 0.01% and 0.25% respectively. 12-month T-bill yield rate was only 0.57%.
Even longer term note and bond yield have decreased. Market is lust for shelter as well as potential for some speculation. Exit period of the bonds issued may come before the offical decrease of interest rate ceases at 0%, and government starts to issue higher yield bond to fund its stimuli plan. Yet, after issuance, any wave of speculation may increase. Companies that can be benefited from the stimuli plan may find their corporate bonds issued now may rise in the price during that period.
Another observation is that the T-note/bond-TIPS spread has turned around from deflation expectation to inflation expectation: 5 year inflation expectation is 0.14% and 10 year is 0.59%. Yet, both are small in magnitude.
Despite the expectation of huge money supply, the market does not expect a real inflation will go ahead. Depending on the scale of stimuli, raw materials prices may subject to a rebound due to USD depreciation and demand from infrastructural projects.
Wednesday, December 3, 2008
FED has Already Lowered the Target Rate
Special meeting announcement? No. Insider News? No.
Please just pay attention to FED Funds Rate: 0.38%, and 2 weeks before it had dropped to 0.5%. Last friday, before the finish of rebound, FED funds rate did touch 0.38%. It rebounded on Monday to 0.5%. But last night it touched 0.38% again and now sits there.
FED Funds Rate is the actual rate that the banks "borrow" the surplus of the counter party bank in the FED balance. FED can adjust and usually adjust this rate close to the Target Rate (now 1%) through open market operation.
Yet, ever since 2008, FED has not followed their own Target Rate tightly. The spread has been about 200pts. But ever after the black October and November, the spread has expanded to 400-500 pts, and now even 620pts.
Another observation is on the 3-month T-bill. The Monday auction hits 0.05% discount rate, a huge drop from 0.15% from last auction. Apparently FED cannot wait until another week.
Despite the "advanced drop" of interest rate, the risk premium charged on corporate (3A banking and finance rate) and on mortgage do not fall in proportion: 5-yr: 543 pts -> 552 pts; 10-yr: 611 pts -> 652pts; 30-yr fixed: 483 pts -> 514 pts;1-yr ARM: 499 pts -> 548 pts.
Market has not hit the bottom yet. Most experienced investors currently will adopt Mr. Cho's method (a small percentage for "gambling" and others in cash or cash equivalent vehicles). Thus, there are money rolling in the market and fluctuating it. Nevertheless, since these money targeting on making profits through both long and short position, coupling with the overall continuous economic downturn the rebirth of the equity market is still not in the recent future.
Please just pay attention to FED Funds Rate: 0.38%, and 2 weeks before it had dropped to 0.5%. Last friday, before the finish of rebound, FED funds rate did touch 0.38%. It rebounded on Monday to 0.5%. But last night it touched 0.38% again and now sits there.
FED Funds Rate is the actual rate that the banks "borrow" the surplus of the counter party bank in the FED balance. FED can adjust and usually adjust this rate close to the Target Rate (now 1%) through open market operation.
Yet, ever since 2008, FED has not followed their own Target Rate tightly. The spread has been about 200pts. But ever after the black October and November, the spread has expanded to 400-500 pts, and now even 620pts.
Another observation is on the 3-month T-bill. The Monday auction hits 0.05% discount rate, a huge drop from 0.15% from last auction. Apparently FED cannot wait until another week.
Despite the "advanced drop" of interest rate, the risk premium charged on corporate (3A banking and finance rate) and on mortgage do not fall in proportion: 5-yr: 543 pts -> 552 pts; 10-yr: 611 pts -> 652pts; 30-yr fixed: 483 pts -> 514 pts;1-yr ARM: 499 pts -> 548 pts.
Market has not hit the bottom yet. Most experienced investors currently will adopt Mr. Cho's method (a small percentage for "gambling" and others in cash or cash equivalent vehicles). Thus, there are money rolling in the market and fluctuating it. Nevertheless, since these money targeting on making profits through both long and short position, coupling with the overall continuous economic downturn the rebirth of the equity market is still not in the recent future.
Tuesday, December 2, 2008
Bond Price Rose After Settlement; USD Dropped – What are the Inspirations?
3-month T-bill price rose from 0.10% (“discount rate”) on Monday after the auction of 0.15% bulk to 0.04% on Friday after closing. 6-month T-bill price fluctuated from 0.39% closing last week to 0.54% after the sale of 0.55% bulk and then rose to 0.44%. 12-month T-bill price rose from 0.94% after the auction of newly issued 1.05% bulk to 0.81% on Friday after closing.
Longer term notes and bonds prices have similar fluctuation pattern: dropping after stock market advancement then rallying and rebounding back to a relatively high level.
Corporate bond yield has dropped by 12pts (for investment grade) and 140pts (for junk bond) to 7.98% and 22.00% respectively after the announcement of the bailout of Citibank and the grand scale stimuli plan by USA, UK, China, and other governments.
Despite the softening of government bond prices and the trace decrease of corporate bond yield, both governments bond prices and corporate bond yield remain high. Most of the economic data announced confirm the recession and project a dim future. Although stimuli plans by various governments help restore the market confidence and lure part of the cash reinvest on equity market, investors’ confidence is still weak, and their attitude is still risk-adverse. Hence, regardless the recent strong rebound on stock market, on average 15-20% from the lowest point in 14 days, money still seeks shelter and drives the bond price up amidst fluctuation.
The 3A banking and finance rates echo to the market worries on corporate survival: 6.34 and 7.11% respectively, comparing with 5.98% and 6.95% closing last week. Combining with the corporate bond yield rate, it shreds no light to the coming 3 months company performance.
Another factor that drags down the rising speed of bond price is the expected decrease of FED target rate and hence the over-supply of USD. USD rate against EURO and GBP have decreased from 1.24 and 1.43 to 1.27 and 1.55 respectively. Such decrease makes USD asset, including government bonds, unfavorable. It is temporary, though, for ECB and BOE will announce another wave of decrease of interest rate to cope with the existing shrinkage of credit. Yen, under the deleveraging, will surge due to unwind of carry trade. It will hammer the Japanese export stock accordingly.
The flooding of money may or may not cause another wave of asset appreciation. Two scenarios can be expected.
The first scenario sets on the competition of resources between government and corporate. So far the debt market has not changed its pessimistic view on corporate as shown on the high corporate loan rate and corporate bond yield rate. The enormous government stimuli plan, including direct bailout of troublesome corporate, guarantee on mortgages of home owners, and investment on infra-structural projects, will be done by the government directly to the market without intermediates. Although it avoids the problem of blockage of capital flow by banks for capital reserve, it weakens the multiplier effect since the value chain from the government directly to the corporate is short. Corporate receiving the fund will only save more retained earnings rather than reinvestment/expansion/distributing dividends so as to polish their balance sheets. Infra-structural projects usually result in redundancy and wastage of resources even though in the construction period the commodity price may rebound. None of the above can inflate the market with sustainable capital.
In addition, government needs to issue more higher-yield government bonds to raise funds from the market (without raising tax rate) for stimuli plan; thus, it competes for fund with and actually sucks the essential seed money from private sector. It is reflected on the lowering of government bond yield rate. With the expectation of the slow pace of equity market and company expansion as well as of the higher intervention from the government, market will invest and even speculate on government bonds. The auction price of the government bond will start initially lower to attract investors, and in spite of the lack of room of further decreasing interest rate, the lack of alternative risk justified instrument will drive investors to compete for government bonds and drive the price higher. As a result, the money supplied by the government will return to the government, with only a small part really stay in the market and roll. Corporate will follow the same route disregard of the higher cost of capital. Debt market will be the next appreciating market.
The other scenario will sets on the excessive supply of the money to the market and induce a hyper-inflation. This scenario will happen when government expands the state-owned sector over the private sector. Under the government direct management, political considerations will over-ride the economical and commercial ones. Labour will be over-paid and will under-perform. Organization size will inevitably grow, and efficiency of production will decrease. Stickiness of salary and government expenses through the purchases of unnecessary resources at over-stated price and the creation of redundant jobs may provide a temporary secure feeling to the public. They may spend more and induce a boost on internal consumption. Meanwhile, the corporate, under the government protection, will earn unexpected profits and be tempted to expand further. Bureaucrats will encourage these behaviors for their better evaluation of performance and corruption. These excessive demands will drive the equity market, commodity market and property market high and lower the attractiveness of bond market (and leave the government with even higher deficit). Yet, without substantial growth of GDP due to low efficiency, soon asset and consumer product prices will overshoot and result in hyper-inflation. Under such scenario, gold, and probably oil and agricultural product, price will shoot up high. Stock market will be highly volatile, and debt market will plummet.
Longer term notes and bonds prices have similar fluctuation pattern: dropping after stock market advancement then rallying and rebounding back to a relatively high level.
Corporate bond yield has dropped by 12pts (for investment grade) and 140pts (for junk bond) to 7.98% and 22.00% respectively after the announcement of the bailout of Citibank and the grand scale stimuli plan by USA, UK, China, and other governments.
Despite the softening of government bond prices and the trace decrease of corporate bond yield, both governments bond prices and corporate bond yield remain high. Most of the economic data announced confirm the recession and project a dim future. Although stimuli plans by various governments help restore the market confidence and lure part of the cash reinvest on equity market, investors’ confidence is still weak, and their attitude is still risk-adverse. Hence, regardless the recent strong rebound on stock market, on average 15-20% from the lowest point in 14 days, money still seeks shelter and drives the bond price up amidst fluctuation.
The 3A banking and finance rates echo to the market worries on corporate survival: 6.34 and 7.11% respectively, comparing with 5.98% and 6.95% closing last week. Combining with the corporate bond yield rate, it shreds no light to the coming 3 months company performance.
Another factor that drags down the rising speed of bond price is the expected decrease of FED target rate and hence the over-supply of USD. USD rate against EURO and GBP have decreased from 1.24 and 1.43 to 1.27 and 1.55 respectively. Such decrease makes USD asset, including government bonds, unfavorable. It is temporary, though, for ECB and BOE will announce another wave of decrease of interest rate to cope with the existing shrinkage of credit. Yen, under the deleveraging, will surge due to unwind of carry trade. It will hammer the Japanese export stock accordingly.
The flooding of money may or may not cause another wave of asset appreciation. Two scenarios can be expected.
The first scenario sets on the competition of resources between government and corporate. So far the debt market has not changed its pessimistic view on corporate as shown on the high corporate loan rate and corporate bond yield rate. The enormous government stimuli plan, including direct bailout of troublesome corporate, guarantee on mortgages of home owners, and investment on infra-structural projects, will be done by the government directly to the market without intermediates. Although it avoids the problem of blockage of capital flow by banks for capital reserve, it weakens the multiplier effect since the value chain from the government directly to the corporate is short. Corporate receiving the fund will only save more retained earnings rather than reinvestment/expansion/distributing dividends so as to polish their balance sheets. Infra-structural projects usually result in redundancy and wastage of resources even though in the construction period the commodity price may rebound. None of the above can inflate the market with sustainable capital.
In addition, government needs to issue more higher-yield government bonds to raise funds from the market (without raising tax rate) for stimuli plan; thus, it competes for fund with and actually sucks the essential seed money from private sector. It is reflected on the lowering of government bond yield rate. With the expectation of the slow pace of equity market and company expansion as well as of the higher intervention from the government, market will invest and even speculate on government bonds. The auction price of the government bond will start initially lower to attract investors, and in spite of the lack of room of further decreasing interest rate, the lack of alternative risk justified instrument will drive investors to compete for government bonds and drive the price higher. As a result, the money supplied by the government will return to the government, with only a small part really stay in the market and roll. Corporate will follow the same route disregard of the higher cost of capital. Debt market will be the next appreciating market.
The other scenario will sets on the excessive supply of the money to the market and induce a hyper-inflation. This scenario will happen when government expands the state-owned sector over the private sector. Under the government direct management, political considerations will over-ride the economical and commercial ones. Labour will be over-paid and will under-perform. Organization size will inevitably grow, and efficiency of production will decrease. Stickiness of salary and government expenses through the purchases of unnecessary resources at over-stated price and the creation of redundant jobs may provide a temporary secure feeling to the public. They may spend more and induce a boost on internal consumption. Meanwhile, the corporate, under the government protection, will earn unexpected profits and be tempted to expand further. Bureaucrats will encourage these behaviors for their better evaluation of performance and corruption. These excessive demands will drive the equity market, commodity market and property market high and lower the attractiveness of bond market (and leave the government with even higher deficit). Yet, without substantial growth of GDP due to low efficiency, soon asset and consumer product prices will overshoot and result in hyper-inflation. Under such scenario, gold, and probably oil and agricultural product, price will shoot up high. Stock market will be highly volatile, and debt market will plummet.
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