|
June 22, 1990
Mortgage discounts increased again this week in response to fears of large money needs by the Treasury.
Durable Goods Orders rose 3.9%, and First Quarter Gross National Product was revised up to 1.9% growth from 1.3%. Housing Starts fell 1.4% to recession levels, and consumer spending is weakening.
An internal Fed report admitted a shortage of credit (though Greenspan still publicly denies it), particularly for commercial real estate, but indicated that the economy was still growing. There is another load of Treasury paper coming in July, and in the third quarter of 1990 the Treasury will raise a record total of $70 billion in new cash.
The bond market has tended to weaken before auctions for years in the normal investor hope for cheaper prices caused by new supply. Dealers have had a reasonable selfinterest in lower prices before auctions because they could enjoy inventory markups after the sales.
The behaviour of the market in the last year going into auctions suggests something darker, and a little too wellorganized.
Before last May's auctions, the Wall Street propaganda mill sounded like John Belushi shouting "Food Fight!", but the actual words were "Bear Raid!" When the bears gather to drive prices down in concert, they hope to buy cheaply during a panic they have created on purpose.
Manipulating the stock market, where widows and orphans are wellprotected, will win you a bunk next to Mike Milken at the Federal farm. However, the goverment securities market is a rough neighborhood, and successful inducers of panic get rich.
Beginning last Friday, June 15, every news headline, every bond broker phone call, every Financial Network News commentary the whole Wall Street machine has held that the Fed would never ease again, bonds would crash, and the Treasury needed to borrow every dime in the western world.
The propaganda has worked for a week, but the backdrop of weak economic data is going to keep the dealers from driving prices down much farther. Mortgage rates will have some scary days as the summer auctions unfold, but nothing like the 11% bear raid in April and early May.
The Fed is still very tight, and is risking recession to drive inflation down. We continue to believe that the long term trend is lower rates.
|
