 |
October 4, 2013
Market Update: Stuck in the Mud
The markets have been rather
quiet this past week. The government shutdown and budget war certainly have
taken up the front page, leaving Treasuries to trade in a very tight range.
The 10yr is bouncing between 2.58 and 2.65 (currently at 2.64) with no sign
of breaking out of that range (not yet at least). I would call the markets
very choppy, meaning there is not a lot of positions being put on or taken
off. Hedge funds, money managers, banks, etc. are staying very neutral.
What I take from rates
trading in a tight range along with traders and money managers not looking to
buy or sell is that, quite frankly, nobody knows what's going to happen.
Nobody knows what budget will be passed; we know a budget will be passed, as
a default on our country's debt would be catastrophic. Think of it like the
lining up of troops along the border. The market is waiting for the signal to
attack and I would expect it will run fast once the canons go off. The
problem is that we are stuck in the mud. There are two ways to get out of the
mud: one is to unbury yourself with a shovel (which is quite slow) and the
other is to be pulled out by an external force. Unfortunately this market
feels more like the former, a very slow and messy shovel job. If you don't
like volatility and you don't mind a little mud, this could be a very happy
place.
Moving back over to the
shutdown and its impact on the market. The market views the shutdown as
sideshow politics and everyone not on Capitol Hill needs to stand on the
sidelines and watch the circus until it's over. The market cannot trade on
data as the Bureau of Labor Statistics will not be releasing jobs and unemployment
data (today is NonFarm Payrolls, usually one of the most volatile trading
days of the month). In fact, if the government is closed next week, the next
NonFarm Payrolls report will be skewed. Can you trust economic or employment
data from a government that's been closed? That certainly creates some
challenges. I've said before that the market has become very data dependent
and now the data has been taken away. So what is driving the market then? The
answer is really 'nothing' and that brings us back to this tight range we've
been in.
On its way down the market
did hit some heavy resistance at 2.58% on the 10yr yesterday. If we were able
to push through that level, we could see 2.48%. Below that is 2.20% but we
are a long way from that happening. Getting down to that level would take
some serious bad news on the outlook of the economy. There is however general
consensus that short term rates will remain low for quite some time. That
does help anchor this market somewhat.
There is also a lot of chatter
that with the government shutdown, even if it's for a few more days, could
delay tapering of asset purchases by the Federal Reserve. That being said the
market is looking for major progress or resolution on the budget over the
weekend. If progress isn't made, the market could become more fragile and
sensitive to the underlying issue that the US economy has some serious
structural headwinds that asset purchases cannot fix. If that happens you
could see a flight to quality (people leave risk and buy Treasuries). That
would certainly help interest rates. Of course over the next few days we
could see the government pull itself together, pass a budget, hug out their
differences, and then it's business as usual. That could hurt interest rates.
My opinion is that we will be somewhere in between. I see them working out a
budget but not certainly a love-fest. After all, we are stuck in some mud.
Regards,
Jason Obradovich
VP of Capital Markets, Performance Home Loans
About Author
Jason Obradovich graduated with a degree in Economics from the
University of California, San Diego and has become known for his U.S.
financial market commentary. Obradovich spent 13 years at Countrywide Bank
where he served as portfolio manager. He also ran the Secondary Marketing
pricing and trading desks, trading more than $1 trillion in mortgages. Before
joining Performance Home Loans in June of 2013, Obradovich served as First
Vice President of Secondary Marketing at Kinecta Federal Credit Union. Obradovich's
vast experience has spanned some of the most unprecedented market
environments providing a noteworthy perspective for his commentary.
|
 |
|||
 |
|||||
|
|
|||||
|
|||||
|
If you do not wish to receive future emails, please click opt out for immediate removal.
Report this email as an unsolicited message. |
|
92606 |
|
Boomerang's Privacy Policy
 |
No comments:
Post a Comment