Interview: Head of fixed income trading and research with deutsche bank private wealth management
>> are you looking for that inversion, meaning the yield on the 10-year to be move lower versus the two-year.
>> i’m not necessarily looking to it but it could take place or close to it today the yield on the two-year is 3.98. and the yield on the 10-year is only 4.18. that’s narrow. so we’re close to narrow and we could get more narrow.
>> let’s talk about how you want to position. how are you dealing with this?
>> well now we’re somewhat short our benchmark in terms of duration position.
>> put that into english for people who don’t understand that.
>> generally i’ll use average maturity. normally we invest in the five-year part of the curve. if we were neutral relative to our outlook for interest rates, or average matureties would be five years. right now they’re closer to 4 1/2, to 4 3/4 years because we think rates could trend higher over the next three to six months. given the outlook for inflation.
>> and what about outside the treasury market . how much are you finding a p.l. outside the treasury market ?
>> when rates are low, spreads on other products like corporates, agencies, mortgage banks, tighten as people go for yield so. there’s not a lot of value or interest outside of treasuries from our point of view.
>> what does it mean in terms of how fully invested you are in terms of the fixed income porm of the portfolios that you at deutsche bank are managing?
>> 95% of average maturity, not duration, we like the cash or the short end of the yield curve, because we think the fed is going to continue to tighten. and the short end of the yield curve, anywhere from let’s say six months to two years, will benefit if higher yield. the 10-year, we don’t see moving much. if not, yields may go higher on the 10-year note.
>> what does it mean for you as an investor and the strategist, that more folks these days are talking about the appeal of cash as the fed has continued to raise rates? we’ve had the 10 straight interest rate series. does it make cash more competitive? more difficult to find places to park for the short-term investment?
>> no, i’m glad that cash is getting more of a focus. because i think it’s one of the few values in the treasury market right now. given our narrow forecast for the trending range of the 10-year, i think people have to be careful about buying 10-year bonds at these levels. therefore the best place for them to be or even for me to be is at the short end of the yield curve, six months out to two years at the max. i would like to see the two-year note, which we get an option of two-year notes tomorrow, when it starts to go above 4% that’s a signal to start buying two’s.
>> you’ve been talking about the three to six-month time period. you i know looking to 2006, you have a lot of interesting thoughts. and the word “stagflation” is included in the 2006 thoughts. is that a possibility?
>> i think so. given the outlook for the economy, which is slower growth in 2006, but with higher energy prices, i think eventually they’re going to have to creep into the c.p.i. and when that happens, you can get slower growth, a little bit more inflation. and all of a sudden the word stagflation will come back into the forefront. and that’s generally a negative time for the bond market .
>> what would you do ahead of that?
>> i would buy short-term treasuries, six months to two years, i think that’s the best place to be right now.
>> gary, thanks so much. gary pollack of deutsche bank private wealth management. with that conversation we’ll head into a quick break and come back with the daily chart of the day. quiet time for volatility in the yield curve. we’ll continue to look at the treasuries in the yield curve. and we’ll be back.
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Listen Market briefing --- Ellen (slow)
Housing boom --- Bret (slow)
Light truck sector --- Peter (slow)
i’m ellen brateman, after the bell. 30 after the hour. let’s recap the day on wall street. where stock decent kleined. the dow ending down 50 points. the s&p losing four. the nasdaq losing four points as well. intel today unveiling a personal computer chip that combines elements of processors for desk top and notebook machines. chief executive paul autolini touted the qualities. zp we’re combining the best of the two architectures into one, to create a next generation power-optimized architecture, designed from the bottom up for performance per watt. without compromising on the requirements of performance for the given tasks at hand.
>> he’s speaking to mirror the success of intel seven tureeno notebook chips which have delivered $5.in revenue since their introduction in 2003. also looking to future chip development. and at the close, the shares down 1.3%. home sales still hot in july they ran at their third-fastest pace ever. yet, at the same time, the report showing more cracks in the housing boom. sales of previouslyly-owned homes last month falling 2.6%, to an annual rate of 7.16 million. bret bearing is following the story. and interesting to balance the fact that you’ve got such strength but coming in weaker than expected?
>> we should keep in mind that purchases were still the third heaviest on record. but the volume more remarkable when you consider the median price of a home rose to an all-time high of $218,000. that’s keeping some industry leaders optimistic.
>> price appreciation still quite smart. you know, 14% year over year for single-family homes, about 11% for condos. i would say no sign of any kind of fundamental weakening in the market yet.
>> low mortgage rates and job gains are expected to keep the housing market growing. but there’s another element 0 to the report. the main limit price appreciation may signal a slowing market . the supply of homes for sale rose to the highest level since 1988.
>> the sales base begins to slow further, we could have a building of inventories. and we could rise above or at least get to a five-month supply. in my opinion, that is a better balanced marketplace for housing.
>> now some economists say that that supply catches up with demand, people may have difficulty selling houses. because buyers have more options. which brings us back to home prices. goldman sachs says if home sellers can’t get the prices here asking for, those homeowners are likely to rein in spending. and less spend something sure to cause a slowdown in the economy. a report on new home sales is due out tomorrow morning. that report is also expected to show a slowdown from june’s record pace. ellen?
>> thanks. and also near record high is the gas prices. and with that level, what you have is the government now requiring auto makers to boost fuel economy standards for light trucks by about 8% in time for 2011 models. the government also proposing to break the light truck sector into six separate categories. lets get the latest on story from peter cook, from washington.
>> well, ellen more than half of vehicles sold in the u.s. through july of this year, fall into the light truck category, which includes sport utility vehicles, pickup trucks and minivans. for the first time since corporate average fuel economy, or cafe standards were proposed, the government is proposing rewriting the cafe rules to reflect the growth in the light truck sector.
>> this is a plan that will save gas and result in less pain at the pump for motorists without sacrificing safety.
>> now currently a car makers 2006 fleet of light trucks must average 21.6 miles per gallon. and passenger cars must average 27.5 miles per gallon. under the proposal, passenger cars would remain unchanged. but by 2011, the entire light truck sector would be divided into six categories. the smallest light trucks will have to reach 28.4 miles per gallon for 2011 models. while the biggest trucks will have to reach 21.3. they say the changes will save consumerers $10 million gallons of fuel in the first year.
>> it’s so dependant upon the details of what comes out. and also it dependant upon the consumer. you know, the consumer is always the unknown factor here.
>> spokesman for ford, g.m., daimler-chrysler and honda say they want it study the proposal first. the head of the alliance of automobile manufacturers say the new regulations pose a challenge for the industry, but one auto makers will meet.
>> the key here is, are we going to preserve customer choice? and that’s really what we’re talking about here. i think nitsa is trying to walk the tightrope, trying to do the right thing. and amongst other things, preserve customer choice while adding new requirements.
>> environmental groups say the proposal doesn’t even include the worst gas guzzlers. s.u.v.’s like the hummer. they say it’s a missed opportunity to improve the environment and make u.s. car makers more competitive.
>> unfortunately, the bush administration might have given a shovel to the big three today, which they’re going to dig their own grave with. this gives them another opportunity to exploit loopholes and not invest in technology. the rule changes open to public comment a final rule is due by april. ellen?
>> ok, peter, thanks. also making news, canada may impose tariffs on some u.s. goods. and the move may come in retaliation for the u.s. decision to ignore a trade panel ruling that is linked to a lumber dispute. canada’s lumber industry executive says canada is looking for the product that would fit that bill. with that, we’ll head into a quick break. coming up, yeeds on 10-year treasuries at their lowest in a month. our guest, gary pollack, head of fixed income trading and research at deutsche bank will tell us where he’s finding value.
