Monday, January 29, 2007

Tanned, rested, and ready

I’m back from vacationing with the mouse. Had a great time, but what does it say about me that I’m walking through Fantasy Land wondering how Disney calculates what revenue to put against what rides and how they decide when to replace one?

Anyway, lot to talk about and I’ll try to get to it all over the course of the week. First, what happened to the Asian bid? As a recent commenter asked, and as I've noted a couple times recently, it seems as though the Asia bid for U.S. bonds has been weak for a couple months now. The 10-year has moved from the 4.40% range in early December, to now 4.88%. But its not just the level of rates in general. High quality spreads are wider, most notably for MBS and swaps. To me, this is a strong indicator that typical long-term buyers have been staying out of the market. Anecdotally, that long-term buyer seems to be Asia.

And yet, has the trade deficit declined in any meaningful way? Is the glut of foreign savings now over? The answer is no.

So it seems there is little doubt that Asia has been absent from the market recently. Perhaps there is some degree of currency diversification going on. But has the Asia buyer exited the U.S. market? No way. Something fundamental would have to change, and yet nothing about the fundamentals has changed.

Put it this way, which would you rather bet on

A) an entire continent changing their core investment strategy over the course of two months for no particular reason

OR

B) some short-term technical issue preventing a group of buyers from being active for a short period of time.

Yeah, me too.

So I’m continuing to buy MBS on recent weakness. Can’t say when they will tighten, but I feel confident that they will.

2 comments:

RW said...

Asia backing off of the treasury market? According to Bloomberg it's OPEC and they're not backing off they're selling (http://tinyurl.com/ypc4qc). Curious; maybe we'll find out when the December TICS survey results come out in a couple months.

Enjoy your blog and appreciate your analysis (but won't be buying any MBS's for awhile I think).

Tom G. said...

Your point about OPEC is a fair one. What I've heard about petrodollar buyers is they are mostly Treasury investors. East Asian buyers are getting involved in agencies, corps, and especially MBS. I talk to big dealer firms every day and lately the MBS traders have been bemoaning the lack of Asian bid. So even if the petrodollar trade pushes rates 50bps higher, I still think the East Asian bid for MBS will re-emerge.

I don't know how clear I made this, but my play on Asia will be on MBS and MBS only, not on rates overall.