Fixed income market
Interview: Henderson Global Invst.---Resis, Harry---Fixed Income Strategist
>> looking over the latest numbers in the professional service, we’ll get you caught up on some of the other after-the-bell earnings reports. medtronic said sales climbed as sales of heart products jumped. 37 cents a share in line with wall street estimates. revenue rose 20% to over $2 billion. medtronic is benefitting by selling more implantable defibrillators. say that five times fast t company also said it plans to petition the court for a rehearing of its patent dispute with johnson & johnson. in the regular session medtronic shares, can’t tell you because they are not showing it to me. i can tell you in the extended hours we see medtronic were up 5 cents in the regular session, currently unchanged at this point. that’s medtronic. abercrombie & fitch said second quarter earnings rose 12% as the company controlled costs and offered fewer discounts. net income with the casual clothing retailer came in at about 35 million, or 35 cents a share, topping wall street estimates. revenue rose about 8%0 nearly $356 million, slightly below estimates. sales at stores open at least a year dropped 8%. the company expects to report per share profit this quarter will be little changed or will rise slightly from a year ago. analysts consensus is 54 cents for this quarter. in the regular session stock rose 79 cents, 2 3/4%. in the extended hours down six cents, a 2/10 of a percent drop. u.s. treasury 10-year note yields held near a 1-year high after the federal reserve left its benchmark interest rates unchanged. for more on what to expect in the fixed income market, including what is ahead for corporate and high yield bond, harry resis joins us head of fixed income. good to speak with you once again. welcome. hi, lane.
>> when you look at listen to what fed had to say, was there anything in the language you found interesting? a lot of people talking about what was in that statement and how it’s now setting them up for the next six months of investing and trading. what did you see there?
>> i think what they said su guys didn’t get it the last time. ef said we are not going to raise rates any time soon and we want to reiterate that. he think it’s fairly clear short-term rates will be low for the foreseeable future, whatever that means. and i think it means at least a year. i think it was a punctuation point on what they said at the last meeting, but think it was meant so that there was no misunderstanding at all this time.
>> when you say “for at least a year,” does that mean no move for at least a year or within an historically low level range for at least a year?
>> oh, you know, a year is just a number. a year, year and a quarter, nine months, something like that. there is going to have to be a reason to raise rates aintsd going to have to be related to inflation. i think what we need to do is watch carefully the p.p.i. and c.pimentd figures going forward, knowing there is room for those numbers to grow and be relatively high before the federal reserve board does something. rather than pinpointing a specific time, you need to look at the p.p.i. and c.pimentd for the next several months to get some sort of a gauge as to whether they are thinking about doing this.
>> they certainly made it very clear they are keeping an eye on those numbers right now. what did you make of the move in the 10-year following the fomc announcements?
>> there is two issues much. clearly short-term rates will remain low for a long time. the 10-year and longer securities are clearly at risk when they do raise rates, whenever that is. we clearly saw in july one of the wovered wovert bond markets ever when the bond vigilantes got wind of the fact that the interest rate scenario when you start it at a 3%10-year rate would be extremely volatile. it’s interesting when you take a look at the mortgage market which really raised rates, the main culprit, there are now more mortgage backed bonds outstanding than u.s. treasury bonds t growth in u.s. treasury bonds from 1995 to present has been zero. the mortgage backed market has gone up 150%.
>> is that a good thing? is that the way it should be or how do you break that down? or does it make any difference?
>> i think what it means is if you get any hint the 10-year rates are going to go higher, the mortgage duration issue has become center stage from july, beginning of july to the end of july, the lehman brothers mortgage duration went from one-year to three years. that’s an incredible leap in duration. it caused mortgage backed players to sell billions of dollars worth of 10-year treasuries. the fact na the u.s. economy is tied so strongly to the mortgage market may not be a particularly good thing, but on the other hand, i think it has to be emphasized that the united states government at all else will preserve the mortgage-bakd market including fannie mae and freddie mac.
>> let’s talk about corporate bonds market. do you think there is enough demand for them out there? >> we had 2.5 billion leave the mutual fund system last week, an all time record outflow, a billion the week before. many people are starting to think this is the end of the high yield market t mu fuel fund industry, the high yield mutual fund market is 14% of the total high yield market. whereas it’s the most visible and easiest to track in terms of flows, it’s really a small segment of the total high yield market with the institutional market really accounting for two thirds of the total high yield market. so, yes, the answer is there is plenty of money to buy these deals if they are priced appropriately.
>> are these two priced appropriately?
>> don’t know, yet. don’t know what the price talk is in the d.a.x. they are in the middle of the charter deal right now.
>> harry resis, head of fixed income and global investments. stay with us.
