C.M.O. 6.08.2009
Credit Market Overview
June 8, 2009
The release Friday of the Bureau of Labor Statistic’s “Change in Nonfarm Payrolls” came in at about 2/3rds of the number that was expected because of the “birth-death factor”. The adjustment was 220,000 jobs which begs the question, even on a Monday, if the adjustment is equal to 40% of what the number probably would have been without the adjustment (a firm called “Shadow Government Statistics” estimated the number to be around 538,000 sans any meddling) than what is the point of the statistic in the first place? If NASA accepted those kinds of fudge factors we would never see any of the people we sent into space again!
The second question Friday’s numbers raise, and this is focused at the rate of unemployment, is; isn’t it a good thing if more people are looking for work? Someone is “unemployed” if they are available to work and are seeking work but currently without work.
When things really hit the skids late last and earlier this year a good number of the country’s population were hiding under the couch and as such not actively seeking employment. To the extent that they now believe the “green shoots” hypothesis then that great horde has now decided it safe to come out and as long as their out they might as well look for a job.
Whether it is the flood of issuance by the Treasury, a belief in the birth/death adjustment or a combination of the two plus other factors, investors in the U.S. Treasury market didn’t wait around for a complete analysis of why the numbers were what they were but headed for the exits instead.
This exodus pushed the yield on the 2-year note from 95bps on Thursday night to 130bps on Friday night; an increase of 35bps or 37%. That the short end of the curve is most closely tied to anticipating actions of the Federal Reserve and moves very little otherwise, the Treasury market on Friday put themselves firmly in the “Green Shoots Believers” camp. The fall in prices and rise in yields did not only occur on the short end of the curve but along its full length.
There has been much anxiety expressed with regard to “Helicopter Ben’s” ability to get his timing right and begin to drain some of the liquidity he has been flooding the system with since LEH went into the toilet.
To make sure everyone knows he’s tough enough to pull the punch bowl in time he spoke plainly to Congress last week on the matter of the deficit. “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Later in his testimony he said that “concerns about large federal deficits are one cause of the unwanted rise in yields. The wider the deficits, the more the Treasury borrows and the higher rates go. Wider deficits also stir inflation fears, which also push Treasury yields up.” (All of that was before Friday.)
As if the rise in yields on the Government’s debt were not worrisome enough the mortgage rates, so important to reducing the overhang of unsold homes, rose to 5.29% on Friday up from 4.91% just a week earlier.
What is worth noting is that default protection for the U.S.A.’s debt actually decreased slightly on Friday to 39.6bps from 39.96bps on Thursday and down from 48.65bps on May 29th.
This is counterintuitive as higher rates and the attendant higher debt service usually increases the probability of default raising the price of protection. The market, it would appear, it placing more emphasis on the 220,000 adjustment than on the absolute level of rates. It should be fun to see how this one plays out. At least fun in the sense that Iceland going belly up was an absolute riot!
Enjoy the week.
Jim Delaney
