Thursday, December 14, 2006


Rumor #1: There was a rumor circulating around Wall Street yesterday that the out-sized retail sales figure was somehow erroneous and subsequent revisions would bear this out. Never heard what the error might be, and honestly, these rumors float around a lot. The rumor obviously was not widely believed, because the sell off got worse and worse all day.

Rumor #2: Asia is staying out of the U.S. bond market lately. I've heard this from several dealers over the last 2 weeks or so. Asia has been a major reason why interest rates have stayed low over this cycle, and its a popular theory to answer Greenspan's conundrum. So if Asian investors truly are diversifying their assets, this will result in a permanently weaker bid for the U.S. bond market. Its the kind of thing that will be impossible to see on any given day, and even hard to quantify after several years past. But if its true, IF, then there will be pressure on both rates and spreads.

Rumor #3: Money managers came in aggressively to buy on weakness yesterday, according to various desks I talked to. While this might seem doubtful at first, given that the Treasury market kept getting weaker and weaker all day, look below the surface. MBS, swaps, and corps were all tighter yesterday. Traditional money managers and bank portfolios are rarely overweight Treasuries, most make their living on spread product. So when spreads tighten in the face of a very weak Treasury market, it might be a sign that money managers are coming in.

Anecdotally, I talked to one dealer who told me that most of the money managers he talks to are short duration, but still came in to buy yesterday. Why? Its a little of the index conscious attitude I was talking about yesterday.

Let's say your duration is 85% of the index. If a month passes and you do nothing with the portfolio, well then your portfolio is 1 month shorter. Plus you've probably accumulated some cash from normal cash flow. So now instead of 85% you are 81%. What if the market is rallying? You didn't like where rates were before, but the market is going against you and you've allowed the portfolio to drift to an even lower duration than you really wanted. So ironically, many times PM's who are negative on the market are the most aggressive buyers on weakness, because they do not want to allow the drift factor to catch up with them.

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