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First up, update on bond lows in EUR


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Published on Global Fund Wire (http://www.globalfundwire.com)
Home > European bond fund sales rise to EUR26.7bn
European bond fund sales rise to EUR26.7bn

By Emily.perryman
Created 14/06/2010 - 14:57

April 2010 was the second month in a row that European bond funds registered EUR18bn+ of flows, their third highest volume on Lipper FMI records.

Total sales rose to EUR26.7bn this month. Money market funds continued to drag on the total and once excluded, sales rose to EUR31.2bn.

Money market outflows slowed to just a third of last month's volume, and could be signalling the end of the exodus.

Equity fund flows totalled EUR4bn, half of March's total, and were the lowest since March 2009. Emerging markets, US and UK were the sectors of choice.

The top selling groups were Franklin Templeton, HSBC and Aviva with flows of EUR4bn, EUR3.6bn and EUR2.3bn respectively.

For bond fund sales, the best selling group by a wide margin was Franklin Templeton (EUR3.5bn). Global Bond and Global Total Return Bond were its best sellers.

For equity fund sales, the top selling group was Amundi with sales of EUR800m, but the best individual fund performance was ETFLab's DAX ETF with sales of EUR559m.

Articles and Features
Copyright 2009 Hedgemedia Ltd. All Rights Reserved
Source URL: http://www.globalfundwire.com/2010/06/14/50552/european-bond-fund-sales-rise-eur267bn

Published on Global Fund Wire (http://www.globalfundwire.com)
Home > April sees shift from equities to corporate bonds
April sees shift from equities to corporate bonds

By Emily.perryman
Created 14/06/2010 - 13:13

The latest data from the European Fund and Asset Management Association shows a continuing trend of investors’ strong demand for long-term funds, a shift in investor sentiment away from equities towards bonds and balanced funds, and a continuing trend of exiting money market funds.

The trend observed since September 2009 continued in April, with sustained demand for long-term funds and capital outflows from money market funds.

Ucits enjoyed positive net inflows of EUR20bn in April, and net inflows for the first four months of 2010 amounted to EUR116bn.

Net inflows into long-term Ucits (Ucits excluding money market funds) remained strong in April, totalling EUR27b – the same level as in March.

The split of new money between the different types of long-term Ucits differed very much in April from recent months. For the first time since March 2009, net inflows into equity funds fell to almost zero (EUR230m April against EUR8bn for March), reflecting investor concern over the Greek debt crisis and the economic consequences for Europe.

Bond funds were the largest-selling funds (EUR15bn), with corporate bond funds being considered by many investors to be lower risk than equity investments and some sovereign bonds.

Balanced funds also continued to attract net inflows with EUR9bn in April compared to EUR6bn in March.

Outflows from money market funds slowed down to EUR7bn, from EUR19bn in March. Lower cash need on the part of money market funds investors at the beginning of each quarter contribute to explain this development.

Net inflows into special funds reserved to institutional investors fell marginally to EUR6bn in April, from EUR7bn in March.

Total assets of Ucits and non-Ucits increased by 1.4 per cent in April compared to end March.

Articles and Features
Copyright 2009 Hedgemedia Ltd. All Rights Reserved
Source URL: http://www.globalfundwire.com/2010/06/14/50550/april-sees-shift-equities-corporate-bonds

NYTimes.com:

Lorenzo Bini Smaghi, a member of the executive board of the European Central Bank, gave a speech in New York on Monday that shed some light on why Europe’s sovereign debt crisis is such a threat to euro-zone banks — and why the European Central Bank felt compelled to intervene last month in the bond market.
Lorenzo Bini Smaghi, a member of the executive board of the European Central Bank.Michele Tantussi/Bloomberg Lorenzo Bini Smaghi, a member of the executive board of the European Central Bank. Mr. Bini Smaghi offered a primer on a less-discussed aspect of today’s banking system — how government bonds have become a kind of currency that is crucial to institutions’ dealings with each other. When the bonds lose value on open markets, as they have since investors realized the gravity of Greece’s debt problems, the whole functioning of the interbank system suffers and can even come to a standstill, forcing the European Central Bank to step in as intermediary.

In the last 30 years, Mr. Bini Smaghi said, according to a text of the speech, banks have drawn more and more of their funding from so-called securitization, packaging loans into securities that could be traded on open markets. Securitization put the banking system, which previously had relied on deposits to finance loans, into overdrive. As Mr. Bini Smaghi put it at a conference sponsored by Barclays, the British bank, “the securitization of previously illiquid items in banks’ balance sheets gave perhaps the strongest boost to the financial sector.” A related phenomenon is what Mr. Bini Smaghi called the “the rise of collateral.” To get access to short-term funds in the new supercharged financial system, banks borrow from each other. As collateral, they use marketable securities like bundles of real estate loans — securitizations or government bonds.

The volume of interbank lending using such collateral— known as “repos” — is big, Mr. Bini Smaghi said, though there is a lack of data on how big. It is crucial to functioning of the banking system. After the collapse of the investment bank Lehman Brothers in September 2008, banks suddenly lost faith in the value of securitizations tied to the United States real estate market. Without this paper to serve as collateral for interbank lending, the market seized up and the financial crisis began. The seizure of interbank lending forced the European Central Bank to take over the role of intermediary, offering euro-zone banks as much money as they wanted at 1 percent interest in return for collateral like government bonds The European banking system almost seized up again in early May after banks became uncertain about the value of bonds issued by countries like Spain and Portugal. The central bank, which had been winding down the unlimited lending to banks, reversed course. The bank also loosened its collateral requirements, saying it would continue to accept Greek bonds even after downgrades.

Most controversially, the European Central Bank began buying government bonds on open markets “in order to ensure depth and liquidity in those market segments which have proved dysfunctional,” Mr. Bini Smaghi said. The action was necessary because the central bank faced loss of its ability to control interest rates, its most important policy tool, Mr. Bini Smaghi said. But his comments reinforce the perception that the European Central Bank’s bond-buying program was more about propping up the banking system than it was about rescuing Greece. His comments also show that tension in European money markets is not just caused by banks’ doubts about each other’s creditworthiness. It is also a function of the perceived value of the paper they depend on to do business with each other. Could central banks become market-makers of last resort on a permanent basis? Mr. Bini Smaghi suggested they might, though he added it is too early to say for sure. There is a downside to this role, he points out. It could encourage banks to take on too much risk. Without new regulations on interbank lending, Mr. Bini Smaghi said, “central bank activism risks fueling moral hazard in the long run.”

Mortgage Bond Prices Rise to ‘Insane’ Records: Credit
Markets


http://noir.bloomberg.com/apps/news?pid=20601087&sid=aC0TeonWOPiI&pos=5


June 24 (Bloomberg) -- Mortgage securities with U.S.-backed
guarantees are trading at record high prices on speculation homeowner
refinancing will fail to accelerate and as supply of the bonds remains limited.



The average price of $5.2 trillion of bonds guaranteed by
government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae
climbed to 106.3 cents on the dollar yesterday, according to Bank of America
Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31,
when the Federal Reserve ended its program purchasing $1.25 trillion of the
debt.


“It’s gotten insane,” said Scott Simon, the head of
mortgage-backed securities at Newport Beach, California-based Pacific
Investment Management Co., manager of the world’s biggest bond fund. “This is
rarefied air.”


U.S. existing home sales unexpectedly fell last month and
purchases of new houses tumbled to a record low, underscoring how borrowers’ ability
to qualify for financing is limited even as rates drop. Bond prices show
investors aren’t concerned homeowners will pay back the mortgages underlying
the securities early, forcing them to reinvest in new debt at lower yields.


Applications for mortgage refinancings are off almost 57
percent from last year’s peak reached in January, according to the Mortgage
Bankers Association. The average rate on a typical 30-year home loan fell to
4.75 percent last week, down from 5.3 percent in April, the group said June 22.

green lantern wrote:

Mortgage Bond Prices Rise to ‘Insane’ Records: Credit
Markets


http://noir.bloomberg.com/apps/news?pid=20601087&sid=aC0TeonWOPiI&pos=5


June 24 (Bloomberg) -- Mortgage securities with U.S.-backed
guarantees are trading at record high prices on speculation homeowner
refinancing will fail to accelerate and as supply of the bonds remains limited.



The average price of $5.2 trillion of bonds guaranteed by
government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae
climbed to 106.3 cents on the dollar yesterday, according to Bank of America
Merrill Lynch’s Mortgage Master Index. That’s up from 104.2 cents on March 31,
when the Federal Reserve ended its program purchasing $1.25 trillion of the
debt.


“It’s gotten insane,” said Scott Simon, the head of
mortgage-backed securities at Newport Beach, California-based Pacific
Investment Management Co., manager of the world’s biggest bond fund. “This is
rarefied air.”


U.S. existing home sales unexpectedly fell last month and
purchases of new houses tumbled to a record low, underscoring how borrowers’ ability
to qualify for financing is limited even as rates drop. Bond prices show
investors aren’t concerned homeowners will pay back the mortgages underlying
the securities early, forcing them to reinvest in new debt at lower yields.


Applications for mortgage refinancings are off almost 57
percent from last year’s peak reached in January, according to the Mortgage
Bankers Association. The average rate on a typical 30-year home loan fell to
4.75 percent last week, down from 5.3 percent in April, the group said June 22.

This insantiy is confirmed if you look at the recent HFN stragtegy performance. Distressed assets have been up there with long/short equities and with overall large equity/bond capital inflows…

you think we gonna see more write downs green lantern or you buying into this speculation?

I don't think the refinancing problems are going to go away soon. However, if the fed hints that it will begin selling the assets that they have, then prices are bound to fall.

Bond Upgrades Top Cuts for First Time Since ‘07: Credit
Markets


http://noir.bloomberg.com/apps/news?pid=20601009&sid=agUWz14HwXTg


June 29 (Bloomberg) -- U.S. credit-rating upgrades are
poised to exceed downgrades this quarter for the first time since before
markets froze as the economic recovery boosts company profits.

Standard & Poor’s lifted the ratings of 238 U.S.
issuers, including Santa Clara, California-based chipmaker National
Semiconductor Corp. and department-store chain Macy’s Inc., while cutting 210,
according to data compiled by Bloomberg. Moody’s Investors Service upgraded 200
borrowers and lowered ratings on 129. Upgrades haven’t surpassed downgrades
since the second quarter of 2007.

August 9 (Bloomberg)--For the first time since the start of the financial crisis in August 2007, U.S. investors own more Treasuries than foreign holders. Mutual funds, households and banks have boosted the domestic share of the $8.18 trillion in tradable U.S. debt to 50.2 percent as of May, according to the most recent Treasury Department data. The last time holdings were as high, Federal Reserve Chairman Ben S. Bernanke cut interest rates for the first time between scheduled policy meetings as losses in subprime mortgages spurred a flight from riskier assets. Demand for Treasuries from U.S. investors is climbing as consumer spending and incomes stagnate and the savings rate reaches the highest level in almost 18 years -- 6.4 percent in June. The retrenchment by individuals, as well as banks buying government bonds instead of increasing lending, is driving yields lower as President Barack Obama’s administration borrows record sums to finance an unprecedented budget deficit.

“Americans are consuming less and saving more,” said Jeffrey Caughron, the chief market analyst in Oklahoma City at Baker Group, which advises community banks on investing assets totaling $23 billion. “That causes an increase in savings and deposits, which end up being invested in government securities.”

Falling Yields

Treasuries rallied on Aug. 6, pushing two-year note yields below 0.50 percent for the first time, after the government’s payrolls report showed the U.S. lost 131,000 jobs in July, more than economists forecast. The unemployment rate held at 9.5 percent, the Labor Department said. Yields on 10-year notes, which serve as a benchmark for everything from mortgages to corporate bonds, fell to the lowest since April 2009 and closed last week down 0.09 percentage point at 2.82 percent, according to BGCantor Market Data. That compares with this year’s high of 4.01 percent in April. The yield was unchanged at 2.82 percent as of 10:25 a.m. in London. Ten-year yields will rise to 3.17 percent by December and to 3.99 percent at the end of 2011, according to the weighted averages of estimates in two separate Bloomberg surveys of at least 45 forecasters. U.S. government debt has returned 6.95 percent since December, the best start to a year since 2002, according to Bank of America Merrill Lynch’s Treasury Master Index. The Standard & Poor’s 500 Index has gained 0.59 percent during the same period as concern that the U.S. economic recovery may be faltering prompts investors to take fewer risks.

Wealth Retention

Investors have put $136.5 billion into taxable bond mutual funds this year through June, compared with $8.9 billion for equity portfolios, according to the Investment Company Institute, the mutual fund trade group. “People are going to be more conservative going forward,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We have seen the risks, we are not going to leverage ourselves and try to create wealth necessarily. We are going to be more concerned about retention of our wealth.” About $19.7 trillion in household wealth was destroyed during the seven quarters ended March 31, 2009, according to Dean Maki, chief U.S. economist at Barclays Plc in New York. That is nearly 30 percent of the $65.9 trillion in net worth in the U.S. at the end of June 2007.

Savings Rate

The savings rate for American households increased to 6.4 percent, the highest level since June 2009, the Commerce Department said Aug. 3. At the same time, personal consumption and incomes were unchanged. The savings rate has averaged 5.9 percent since November 2008, the most for a 20-month period since 1992 through 1994. It fell as low as 0.8 percent in April 2005, and averaged 2.2 percent from 2005 through 2007. Investors in the U.S. have added to their Treasury positions at a faster pace than overseas holders this year through May. Holdings in the U.S. are up 12 percent to $3.99 trillion, while Treasuries held overseas have risen 7.4 percent to $3.69 trillion. The biggest jump in demand this year among domestic buyers of Treasuries has been commercial lenders. Bank holdings of Treasury and agency securities increased 5 percent to $1.57 trillion last month, according to the latest data available from the Fed. That compares with a 3 percent gain in the first half of the year.

‘Some Skepticism’

“Risk appetite has diminished among both borrowers and lenders,” said Andrew Harding, who helps manage $22 billion as chief investment officer for fixed income at PNC Capital Advisors in Cleveland. “It’s some skepticism on the economy, and also risk aversion. Unemployment is still above 9 percent and doesn’t show signs of coming down below 9 percent.” The Fed’s decision to hold its target for the overnight lending rate at a record low has made it possible for banks to borrow at near-zero interest rates to finance purchases of longer-term and higher-yielding Treasuries while lending less. Commercial and industrial lending by banks has fallen 20 percent since the end of 2008 to $1.2 trillion, as of March 31, the latest data available, according to the Federal Deposit Insurance Corp. Fed policy makers signaled they will probably pass on providing more stimulus at their Aug. 10 meeting and wait to see if signs of weaker economic growth persist. Bernanke told lawmakers in South Carolina Aug. 2 that consumer spending is “likely to pick up” amid a “moderate” expansion.

Reduced Borrowing

Demand for Treasuries is heating up at the same time sales of the securities are slowing. The Treasury lowered its estimate for government borrowing from July through September, reflecting a reduction in federal spending, during an Aug. 2 press conference in Washington. Borrowing will total a net $350 billion in the current quarter, compared with an estimate three months ago of $376 billion. The Treasury also projected borrowing of $380 billion in the three months to Dec. 31. The proportion of U.S. holdings of Treasuries reached 50.2 percent in May, up from as low as 44.3 percent in April 2008, when foreign demand surged as investors sought a refuge in U.S. government bonds following the collapse of Bear Stearns Cos. China has added $35.8 billion to its holdings of Treasury notes and bonds, a 4.3 percent increase to $860.1 billion. At the same time, it has slashed its holdings of short-term bills to $6.8 billion from $69.7 billion at the start of the year. Japan, the second-largest holder, has added $21 billion of the debt, raising its position 2.7 percent to $786.7 billion.

Deficit Concern

The increased emphasis on savings in the U.S. comes as foreign investors such as China express concern over the deficit, projected by the Obama administration to reach $1.47 trillion in the fiscal year that ends Sept. 30. Foreign holders owned $3.96 trillion of the Treasury debt outstanding as of May, or 49.8 percent, Treasury data show. In August 2007, they held $2.22 trillion of $4.45 trillion, or 50.6 percent. China bought more Japanese bonds than it sold for a sixth month in June, heading for the biggest annual increase since at least 2005, according to a report released today by the Ministry of Finance in Tokyo. Treasuries are not safe enough to manage them as part of China’s $2.45 trillion foreign-exchange reserves, Yu Yongding, a former central bank adviser, wrote Aug. 2 in response to questions from Bloomberg News. China is the largest U.S. creditor, followed by Japan. “I do not think U.S. Treasuries are safe in the medium and long run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote. The “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.

Record Issuance

In July 2009, Treasury Secretary Timothy F. Geithner and Secretary of State Hillary Clinton hosted Chinese Vice Premier Wang Qishan and Dai Bingguo, a state councillor, to reassure them that record budget deficits wouldn’t pose a long-term danger. Treasury debt rose 25 percent to $7.27 trillion last year, while foreign holdings increased 20 percent to $3.69 trillion. The last time domestic investors held the majority of outstanding Treasuries, in August 2007, outstanding public debt totaled $4.45 trillion with foreigners owning $2.22 trillion, or 49.8 percent. U.S. government borrowing has increased 9.4 percent, a faster pace than foreign purchases, up 7.4 percent.

The Treasury said economic growth is leading to an improvement in tax receipts at about the same rate as in past recoveries. The Treasury already has begun to trim its borrowing, making auction-size cuts that reduce borrowing capacity by $232 billion when considered over a 12-month period. Investors who have lived through the crash in technology stocks in 2000, the collapse of equities and the housing market in 2008 are increasing the emphasis they place on asset preservation, which may help keep yields lower for longer, said CRT Capital’s Ader. “Three times in the last 10 years I have been personally hit, I’ve experienced a loss of wealth, and I’m not unique as a Baby Boomer,” Ader, 52, said. “This changes dramatically the nature of how we’re going to be looking at our future.”

Seekingalpha.com
By: Felix Salmon

===========================================================================================
In one of those classic understated TBI headlines, Vincent Fernando today says that “Actually You Should Panic” if TIPS yields go positive. His argument: “if TIPS yields hadn’t fallen to where they are now, then we’d truly have something to worry about — Deflation.”

The problem is, Fernando’s math doesn’t add up. Expected annualized inflation, over the next five years, is equal to the yield on 5-year government bonds, minus the yield on 5-year TIPS. (We’ll ignore things like the liquidity premium for on-the-run Treasuries.) 5-year Treasury bond is currently yielding 1.47%, so if the 5-year TIPS yield is slightly negative, that puts expected inflation at about 1.5%. On the other hand, if the 5-year TIPS yield were up at 0.5%, then that would put expected inflation at 1%. Which does not count as Deflation, and is certainly nothing to Panic about.

Of course, it is a bit more complicated than that. For one thing, we’re talking about average inflation over five years, which given that inflation rates tend to bounce around a bit, might well mean a brief amount of time in negative territory. But that, again, isn’t the kind of deflation to panic about.

Meanwhile, deflation does provide one technical reason why negative TIPS yields aren’t necessarily as weird as they look. If we do have a brief bout of deflation, then TIPS coupons will be zero — which is actually positive in real terms. TIPS investors never need to give money back to Treasury. So it’s not necessarily true that you’re getting a negative real coupon: if there’s negative consumer price inflation for any length of time over the next five years, the zero bound on coupon payments might even things out. There’s also a lower bound of 100 on principal repayments, which may or may not come into play depending on the price/yield at which you buy your bonds.

So really, negative TIPS yields can be taken as a sign that the markets are beginning to price in some brief dip into negative-inflation territory. They’re not a sign that the markets are expecting no deflation.

At the moment, I believe in volume confirmation on days when the market-selloffs destroy wealth. There are tons of small guys waiting to jump on the Grizzly bears' backs into a new bear-market for equities. Though, it is curious to me, JPM, BAC, and other institutional investors remain robustly optimistic in regards to higher highs on the SPX. It is possible that equities are stagnant due to the buy and hold mentality. Asset management is rapidly becoming the focus business now on the street: see MSSB, JPM, BlackRock. Could this shift from Prop desks to more traditional Fund Management start a rally after we see a lower low on the SPX? Maybe, but if your not interested in deciphering my convoluted trading philosophies just buy bonds.

Seekingalpha.com:

It is of little wonder that investors are tossing their hands up in the air when looking at investment performance or economic data. What looks promising on the surface is fraught with danger below (like the oil spill?).

Early week data regarding homes was mixed, as refinancing activity was strong (for those that can!), and industrial production was surprisingly strong. However, that was trumped by initial jobless claims hitting 500,000 this past week (the arbitrary line between economic contraction and expansion), while two Fed reports from NY and Philadelphia were both very disappointing. The Dow, after last Tuesday’s close was up over 100 points, finished last week with a thud, down 90+ points and leaving a bad taste in investors' mouths going into the weekend.

The usually manic/depressive markets seem even more so of late, leaving investors with a queasy feeling about the upcoming (usually) weak months of September and October. At this point of an economic recovery (it is one, yes?), there should be a bit more investors can point to showing strength. However, even at this late date, much of the data remains frustrating, similar to a year ago.

When looking behind the headline numbers, last week was somewhat of an anomaly in that the OTC market (technology stocks) rose on the week. Yet more stocks fell than rose for the week. On the NYSE, the averages declined, yet more stocks rose on the week than fell. Interesting information, likely not signifying anything other than the week looked a bit better than the headlines. Some of the trends in the markets have yet to change, volume remains rather modest, although it is rising on days when the markets decline. Many of the averages are trading below their very long-term averages (not a healthy sign), while bonds continue to rally.

So, while many of the signposts in the markets and economy are showing weakness, the averages continue to “hang in” – tension that is likely to be broken either by the economic figures improving or markets declining to meet the less than stellar economic/market numbers. Once Labor Day passes, we should see some fireworks.

The discussion of bubbles everywhere (from tech to real estate to stocks and bonds) is looking more like a Lawrence Welk’s bubble machine! From my way of looking at things, a bubble (and its ending) usually means investors not only lose purchasing power (adjusting for inflation) but also lose money, where the investment is well below (usually 50%+) initial purchase price. Those bashing bonds are making the same claims. Here it gets a bit fuzzy.

While investors may lose purchasing power, individual bond investors have locked in a certain positive return to maturity. Where the argument has some validity, is for bond fund investors, as there is not a future certain maturity date where declines in net asset value may never be recovered. Interest rates can’t go down forever and eventually they will rise. However, we will need to see stronger and sustainable economic growth before that happens. So far, that day remains in the very elusive and uncertain future.

While the basic material sector is showing improvement, now ranked sixth among the nine sectors, much of that strength is coming from the precious metals. However, groups like paper, coal and steel are showing weakness. Analysis of the precious metals (specifically gold) is as animated as those about a bond bubble. The stocks are priced about equal to the underlying bullion, however historically the stocks have sold for a 20-80% premium to bullion prices. So, if the relationship reverts to the more normal relationship, buying stocks and selling bullion should be profitable.

Don’t take that to the bank, as the relationship has been out of whack since the financial crisis two years ago. Since that time, the relationship has been centered on the one-to-one ratio than the normal range. The commodity group remains ranked among the top quartile, however, it has been slowly sliding lower over the past two months. Coal and steel have been among the more volatile groups within the basic materials group and are now ranked near the bottom of the weekly list. If the precious metals do weaken, then I would expect the basic materials to do likewise, following the more cyclical parts of the markets that have already been declining with weaker economic data.

Very little over the past few weeks has shaken my concern regarding the lack of sustainable economic growth and lack of catalysts for significantly higher stock prices. And so the trading range persists. High quality large-cap remains cheap, but it too is locked in a range. Bond yields may rise in the coming weeks, if only to take a break from the steady decline. However, there is little in the economic data pointing to a change in the trend to still lower yields ahead.

Disclosure: None

About the author: Finance Banter

Seekingalpha.com
By Rom Badilla

After seeing losses in the month of August, stocks rallied on the first day of September and Treasuries collapsed as economic fears seemed to ease. The rally was mainly fueled by better than forecast manufacturing activity in China and the U.S. Stocks and commodities gained as investors finding their appetite for risky assets. Dow Jones gained 2.54%, cutting close to half of its 4.3% loss in August.

Economic Data

Manufacturing activity in the U.S. accelerated in August according to the Institute for Supply Management, defying widespread belief that the economy is in the midst of a slowdown. ISM reported that its survey index increased to 56.3 in August from 55.5 in the previous month. The increase surprised market expectations as economists forecasted a decline in the national survey to 52.8 after previously released regional surveys such as the Philly Fed survey, suggested slowing activity. The index is a composite of surveys of more than 300 manufacturing firms on the direction of employment, production, new orders, supplier deliveries, and inventories where readings above 50 suggest an expanding manufacturing sector, which in turn suggests economic growth.

In addition, ISM reported that manufacturers saw that prices increased, defying the disinflation/deflationary theme. The Prices Paid Index increased by four points to 61.5 in August. The increase surprised the market as consensus surveys called for a decline in August to a reading of 55.5. The increase follows a massive decline where the index fell from 77.5 to 57.0 in June.

The U.S. Department of Commerce released a report that construction activity declined in July. Construction Spending fell by 1.0 percent in July after a revised prior period drop of 0.8 percent. The decline caught forecasters off guard as economists expected a decrease of just 0.5 percent. July’s print marks the third consecutive decline in construction spending after a peak of 2.3 percent in April 2010.

Prior to the release of the ISM data, Automatic Data Processing revealed that the private sector cut 10,000 employees to payroll in August. The decrease follows the prior month reading which was revised downward by five thousand to a final increase of 37,000 people. In addition, the August number surprised forecasts as economists were expecting an increase of only 15,000 people.

Interest Rates

As the latest block of economic data slightly eased concerns about the global economy, investors bounced on the opportunity and sold off safe assets. Treasury prices slumped as investors flocked to stocks, pushing yields higher across the curve. The 10-Yr bond fell pushing yields 11 bp higher to 2.57%. Shorter maturity bonds sold off less, as the yield on the 2-Yr climbed 3 bp to 0.50%. Yields on the 5-yr bond gained 7 bp to 1.40%. The Long Bond sold off the most as yields rallied 13 bp to 3.65%. (Click to enlarge)



Inflation expectations, as indicated by the yield differential between 10-Yr Treasury and TIPS, widened 3 bp and to 1.55%. Government bonds fell across European nations too. The yield on Germany’s 5-Yr Bunds gained 7 bp to 1.26%. 5-Yr French Bonds fell to push yields 6 bp higher to 1.59%. 5-Yr U.K. Gilts sold off as yields ended 7 bp higher at 1.69%.

Across the peripherals, government bond performance as seen by the 5-yr bonds was mixed. Portugal’s bonds shed slightly as yields crawled up 2 bp to 4.04%. Ireland’s bonds gained as yields pushed 8 bp lower to 4.57%. Italy’s bonds gained too, as yields ended 3 bp lower at 2.62%. At 11.55%, yields were 25 bp lower than yesterday as Greece bonds gained the most. Spain’s bonds ended higher as yields shed 7 bp to end at 2.99%.

Credit Markets

The spread of the BofA Merrill Lynch U.S. High Yield Master Index, which tracks high yield corporate bonds, narrowed 8 bp to close at 6.80% over Treasuries with comparable maturities. The difference in yield between 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury tightened 6 bp to 0.78%.

Across the Capital Markets

Stocks started the month on a very positive note as most indices rallied on slightly improved economic data. The S&P rallied 2.95% or 30.96 points to 1080.29. NASDAQ improved 2.97% to 2176.84. The CBOE Volatility VIX index fell 8.3% to 23.89.

The dollar index, which measures the performance of the greenback against six major currencies of the world, shed 0.9% to 82.45. The Euro gained 1% against the dollar to 1.2809. The British Pound gained 0.6% against the greenback to 1.5455.

Gold spot price shed 0.3% to 1244.30. Crude oil spot price gained 2.8% to $73.91.