Stocks and bonds under Fed pressure

By Hibah Yousuf @CNNMoneyInvest May 13, 2013: 4:51 PM ET
Article from http://money.cnn.com/

NEW YORK (CNNMoney)

The jokes about QE Infinity may come to an end soon.

The Federal Reserve and its bond buying program were a hot topic Monday, following a Wall Street Journal report over the weekend that said central bank officials are considering an exit strategy for the massive stimulus measures that have been fueling the economy since late 2008. Stocks finished mixed Monday.

Currently, the Fed buys $85 billion a month of mortgage-backed securities and Treasuries. And just last month, the central bank said it stands ready to either "increase or reduce the pace" of those purchases in response to economic activity.

"The article does not say that the Fed will start tapering the pace of bond purchases immediately, but it provides a window into sentiment at the central bank," said Zach Pandl, senior interest rate strategist at Columbia Management. "Faced with conflicting information on the economy, Fed officials have decided to see the glass as half full. They are thinking about the exit, not about how to do more."

The fear that the Fed may begin to unwind its loose monetary policies sooner rather than later put pressure on U.S. Treasuries, with the 10-year yield spiking to a nearly two-month high of almost 1.96% before settling around 1.92%. Just a month ago, yields were hovering around 1.6%. Treasury prices and yields move in opposite directions.

Meanwhile, the Dow Jones industrial average slipped about 0.2%, while the S&P 500 and Nasdaq finished barely higher. But the gain in the S&P 500 was enough to push it to another record close.

The Fed's policies have been widely given credit for boosting stocks over the past few years.

As investors debate the Fed's next moves, here are five more things investors were watching:

1. Stocks remain near record highs as valuations creep up. Although the Dow fell Monday, it finished last week at a record high. The Nasdaq closed at its highest level since November 2000.

With stocks up so sharply this year, valuations have also crept higher. At its closing high last week, the S&P 500 traded at more than 16 times 2012 earnings, the highest P/E ratio in three years according to Eddy Elfenbein of the blog Crossing Wall Street.

However, stocks are still trading at less than 15 times 2013 earnings estimates.

2. Retail sales unexpectedly rise: Retail sales edged higher in April, as strong car sales and spending on building supplies helped make up for weakness in other sectors. Economists had expected sales to decline.

Mark Luschini, chief investment strategist for Janney Montgomery Scott, said retail spending "continues to show remarkable resilience," especially after the expiration of the payroll tax holiday earlier this year.

3. Earnings continue to roll in: Companies will continue to open their books this week, with Macy's (M, Fortune 500), Wal-Mart (WMT, Fortune 500) and J.C. Penney (JCP, Fortune 500), as well as networking firm Cisco Systems (CSCO, Fortune 500) on deck.

Shares of Tesla Motor (TSLA)extended last week's rally. The electric car maker reported its first quarterly profit last week, and a separate report said Tesla sales outperformed German luxury brands.

SolarCity (SCTY), whose chairman is Tesla CEO Elon Musk, reported a quarterly loss after the closing bell Monday. Shares fell after hours but they had surged to an all-time high in regular trading Monday. Shares of other solar firms were energized by SolarCity's advance earlier in the day. Shares of First Solar (FSLR), SunPower Corp. (SPWR), LDK Solar (LDK) and ReneSola (SOL) also rose.

Most major companies have announced their first-quarter earnings and results have been pretty good. According to S&P Capital IQ, of the 453 S&P 500 companies that have reported first quarter results, 301 have beat analysts' estimates, 115 have missed, and 37 have met.

4. Disappointing data from China: Asian markets ended mixed after a report showed China's industrial production expanded in April, but failed to meet expectations. The Shanghai Composite declined 0.2% and the Hang Seng dropped 1.5%.

But the weakening yen pushed the Nikkei up 1.2%. Tokyo's benchmark index has rallied by 42% since the start of the year based on optimism about the country's aggressive monetary policy.

5. Muddy Waters reportedly shorting Standard Chartered: Standard Chartered (SCBFF) fell into the spotlight after famed short-seller Carson Block of Muddy Waters Research was reported to have announced he is betting against the bank, saying its assets were deteriorating.

European markets finished the day mixed, losing momentum after a strong performance last week.  

First Published: May 13, 2013: 10:13 AM ET
Hibah Yousuf @CNNMoneyInvest May 13, 2013: 4:51 PM ET
Article from http://money.cnn.com/

BOJ may seek ways to calm bond yields, policy on hold

By Leika Kihara
TOKYO | Thu May 16, 2013 11:29pm EDT
Article from http://www.reuters.com/article/

(Reuters) - The Bank of Japan is expected to stand pat on monetary policy next week despite jitters over the recent jump in bond yields, hoping it can stem the volatility by fine-tuning market operations.

The central bank may front-load bond purchases or offer funds via market operations more frequently if the bond market turbulence persists, which are technical steps that can be taken by its bureaucrats without approval by the nine-member board.

It is expected to hold off on easing policy through further increases in asset purchases, having already pledged in April to double its bond holdings in two years to expand the supply of money at an annual pace of 60 trillion ($588 billion) to 70 trillion yen.

The recent bond selloff, which sent the 10-year yield to a one-year high of 0.92 percent on Wednesday, has highlighted the dilemma the central bank faces as it attempts to generate inflation in a country mired in price falls for 15 years.

"The BOJ is walking a very narrow path trying to engineer a gradual, not a sudden, rise in long-term rates backed by improvements in the economy," said an official with knowledge of the central bank's thinking.

The BOJ unleashed the world's most intense burst of stimulus last month, promising to inject $1.4 trillion into the economy in less than two years to meet its pledge of achieving 2 percent inflation in roughly two years.

By gobbling up 70 percent of the bonds newly issued by the government, it hopes to nudge Japanese investors out of the safety of bonds and into riskier assets like equities.

The rise in Tokyo shares to a 5-1/2-year high shows this may be starting to happen.

BOJ officials say they would accept a natural rise in long-term interest rates that reflect prospects of an economic recovery and future inflation.

But the intensity of the BOJ's purchases caused disruptions in the market by drying up liquidity, making bond prices vulnerable to sharp swings that could potentially lead to a damaging sell-off hard to control.

The pace of bond price falls and the huge volatility has made some central bankers nervous, but not enough to consider additional policy steps at the two-day policy meeting that ends on Wednesday next week.

LACK OF SOLUTIONS

Japan's economy expanded at an annualized 3.5 percent in the first quarter, the fastest in a year, offering evidence that Prime Minister Shinzo Abe's sweeping stimulus is beginning to work.

The BOJ may thus revise up its assessment of the economy to say it is picking up, compared with the previous month's view that it is "bottoming out with some signs of a pick-up."

But a sustained sharp rise in bond yields will hurt corporate capital expenditure, the soft spot of an otherwise more robust economy, and strain Japan's already tattered finances by boosting the cost of funding its huge debt pile.

Finance Minister Taro Aso appeared sanguine so far, telling parliament on Friday that it made sense for investors to shift funds out of bonds and into equities given recent sharp rises in Tokyo stock prices.

For now, the central bank hopes to use market operations to stem the volatility. It did so on Wednesday by offering to inject 2.8 trillion yen into the Tokyo money market, more than three times the size usually offered in a single day.

If volatility persists, the BOJ may also consider increasing the amount of bonds it buys each month from the current 7.5 trillion yen until bond prices stabilize, sources say.

But there is no guarantee that such minor tweaks in its bond-buying program can soothe market jitters for long. Wednesday's huge fund injection failed to prevent bond yields from ending higher for a fourth session.

Expanding stimulus, by pledging to increase bond purchases even more, could backfire by draining already thin liquidity in the market.

"The bond market has been distorted by the BOJ. It's reliant on central bank purchases more than ever, and a lack of liquidity will keep it vulnerable to sharp swings," said Masaaki Kano, chief Japan economist at JPMorgan Securities.

"The BOJ probably didn't expect so much volatility, and simply boosting its bond purchases won't solve the problem."

($1 = 101.9600 Japanese yen)

(Editing by Kim Coghill)

JAPAN


Leika Kihara
TOKYO | Thu May 16, 2013 11:29pm EDT
Article from http://www.reuters.com/article/

Australia to Sell 2025 Bond Next Week, Slow Sales Pace in ’13-14

By Garfield Reynolds - May 15, 2013 9:22 AM GMT+0800

Article from http://www.bloomberg.com/news/

Australia will sell a new 2025 bond next week and slow the pace of gross debt offerings in the fiscal year starting July 1 as the government seeks to rein in budget deficits.

Notes maturing April 21, 2025, will be offered through syndication, the Australian Office of Financial Management said today in an e-mailed statement. The funding arm said it expects to sell about A$50 billion ($49.5 billion) in the coming fiscal year. That compares with the A$53.6 billion of sales indicated for the 12 months ending June 30 in the federal budget presented by Treasurer Wayne Swan in Canberra yesterday.

The amount of outstanding government bonds maturing in a year or more will rise to A$260 billion by June 30, 2014, from an estimated A$233 billion a year earlier, the budget shows.

May 15 (Bloomberg) -- Australian Shadow Finance Minister Andrew Robb talks about the budget announced yesterday and the outlook for the country's economy. The government will spend A$24 billion ($23.8 billion) on road and rail projects, while targeting A$43 billion of savings over five years in an effort to return to surplus by 2016-17, Treasurer Wayne Swan said in budget papers released yesterday. Robb speaks from Canberra with Susan Li on Bloomberg Television's "First Up."

Julia Gillard, Australia’s first female prime minister, trails in opinion polls with an election due Sept. 14, after a blown pledge to return the budget to surplus and mining taxes that failed to reap promised revenue. Swan forecast the deficit will be A$19.4 billion this fiscal year, after projecting a surplus in October forecasts, as revenue dropped A$16.6 billion from previous estimates. The budget shortfall is projected to shrink to A$18 billion in the 12 months ending June 30, 2014.

Next week’s sale of a new bond line will be managed by Citigroup Inc., Deutsche Bank AG, UBS AG and Westpac Banking Corp., the AOFM said in its statement. The funding arm expects to sell A$700 million of bonds on most Wednesdays and Fridays from the week starting May 27 until the end of the financial year, it said.

Linker Sales

The AOFM will offer A$150 million to A$250 million of 2022 indexed notes this month and a similar amount of 2025 inflation-linked debt in June. The government will double sales of linkers to A$4 billion in the coming fiscal year, increasing the amount of such notes to A$22 billion.

That will swell the nation’s outstanding securities to at least A$282 billion by June 30, 2014, 6 percent shy of the A$300 billion legal borrowing limit. Swan raised the limit on borrowings this fiscal year from A$250 billion.

Australia’s sovereign debt market has more than quadrupled since the end of 2008 as the government borrowed to fund stimulus programs during the global financial crisis.

Yields Declined

Over that time, the nation’s benchmark 10-year bond yield dropped to 3.30 percent as of 11:18 a.m. in Sydney from 3.99 percent on Dec. 31, 2008. It climbed to as high as 5.88 percent in April 2010 and reached a record low 2.698 percent on June 4, 2012. The premium over similar-maturity U.S. notes was at 133 basis points, down 19 basis points this year.

Average yields at bond auctions fell to 3.23 percent in 2012, the lowest annual average in Australian Office of Financial Management data going back to 1982. The average this year is 3.29 percent, after the AOFM sold A$600 million of notes maturing in 2027 at an average yield of 3.6289 percent at auction today.

Net debt will peak at A$191.6 billion in 2014-15, or 11.4 percent of gross domestic product, up from A$161.6 billion, or 10.6 percent, in the current fiscal year, according to the budget. U.S. net debt is expected to peak next year at 89.7 percent of GDP, when the average for advanced nations will be 79.1 percent, the International Monetary Fund said last month.

To contact the reporter on this story: Garfield Reynolds in Sydney at greynolds1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

Garfield Reynolds - May 15, 2013 9:22 AM GMT+0800

Article from http://www.bloomberg.com/news/