Pork n’ Bonds
Sally Limantour
Various commentaries over the weekend point to many reasons why interest rates rose recently. Bill Gross throwing in the towel; massive duration hedging required by portfolios; a 12.5 billion reduction in foreign holdings of US Treasury and Agency securities, and yes pork prices climbing 43 percent in the first three weeks of May from a year earlier.
Bloomberg reports: “China's inflation probably accelerated in May as pork prices soared, increasing the likelihood that interest rates will be raised”. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aNDCG3kLYQqg
Seriously, we have pointed out here that food prices together with rising money supply (around the globe) and recent labor price increases have lead to bond yields increasing.
On a technical basis I have been charting two things – the pattern of lower highs on the weekly 30 year Treasury futures and the 50% level from the highs on 6/20/03, of 122 27/32, to the lows on, 6/18/04 of 10228. That 50% level is 11300 and we continue to reject it.
While Mr. Gross of Pimco “capitulated” last week this was something in the making as he was beginning to get uncomfortable with his bond positions the summer of 06. I quoted his discomfort at HamzeiAnalytics.com from an interview in the WSJ back on August 23, 2006:
“The Bond King, Bill Gross, of Pimco, who had bet on the economy slowing, was so stressed from positions going against him that he took an unplanned vacation. “I just had to leave for 9 days, I couldn’t turn on business television, I couldn’t pick up the paper, and it was just devastating.”
So what now? My guess is we continue this pattern of lower highs and I will continue to sell decent rallies. Bond yields are not high by historical standards and typically once a trend change in bonds is started it continues for years.
Higher rates remain a long-term theme.
Food accounts for a third of the consumer price index and meat alone for 7 percent. ``The size of gains on stock markets, as well as the likelihood that food prices will keep consumer price inflation high in coming months has depressed bond prices in anticipation of rate hikes,'' M2, the broadest measure of money supply in China, probably jumped 16.9 percent in May from a year earlier, exceeding the government target for a fourth month, according to the Bloomberg News survey. The central bank may release the figures as early as today.
China's producer prices may climb 3 percent in May from a year earlier after increasing 2.9 percent in April, the survey showed. The statistics bureau will release the figures today.
