Interview: First American Asset Mgm --- Keating, Joseph ---ief Investment Officer
>> 10-year note yields rose to the highest level since last ma. what this d this mean for the economy and bond investors? we turn to joe keating. he joins us from birmingham, alabama. welcome, joe.
>> hi, lori.
>> today we leashed the services industries is expanding faster than forecast, yet earlier this week we saw a report showing housing and spending slower. how could do you characterize the economy.
>> i characterize it as short of interesting right now. we’ll have a nice rebound in the reported g.d.p. statistics for the first quarter, but in many ways, lori, it will be a head bake. as we go through the remainder of the year, the economy will slow to 2-3%, as opposed to first quarter number, is around fourth quarter.
>> and we’re speeding up, only to slow down as the year wears on?
>> i think that’s exactly it. and the primary reason i sympathy going to be the housing sector. you mentioned we had some housing data earlier this week if you take a look at the new home sales while they were down a touch, the real interesting part there, lori was that the month’s supply of inventory was at the highest level in three years, after, we had the data on existing home sales, the listings are up 43% on a year over year basis. this is―we’re clearly seeing a shift in the housing market , no longer will it be a source of strength in the overall economy, but soon will be a source of weakness, that will spread from the housing sector itself into all of those expenditures that consumers do related to housing, furniture, appliances, everything else that goes into a home.
>> with the housing slowdown, you’ve told us you see the fed finishing raising rates by march, yet, the bond market , especially today with the yields on the 10-years, seem to be pricing in the fed fund rate. are you aagreement with the market and if so, why?
>> i guess i am. the may increase is 50-50. and will depend on data between now and the may meeting. the march increase is in the bag. that most certainly will happen. but the federal reserve doesn’t want to get into any kind of deflation ear environment. and when have you a slowing in the economy, like we’ll have, and a low base inflation rate in the economy, the federal reserve will be more concerned about making sure we don’t fall into a deflation ear situation as opposed to inflationary situation. we can control―we know how to combat inflationary pressures. it’s tough to combat deflation ear pressures. look at what’s gone in japan over the past decade.
>> let me ask you as far as u.s. bonds. are you surprised by the selloff the last two days?
>> well, yes, prosecute from the perspective we did not know that you were going to have the shift in policy or the hint of a shift in policy in japan, and then, of course, we had the european central bank raise rates yesterday, raised the e-- equilibrium of yield. the highest those yields if the more that will help reinforce what the reserve will do at the shortened of the yield curve, that leads to a slowdown in the economy as we go through the year if we see anything above 4.75%, approaching 5% on a 10-year treasury, investors should be all over it.
>> lehman forecasts the 10-year yield at 5.24% by year’s end. where do you stand?
>> it potentially could happen, but i don’t think it will happen, because there is such voracious demand for risk-free streams of income from investors, baby boomers, foundations, endowments, pension funds, that if you get anywhere close to 5%, will take down that paper pretty darn quickly, if it reaches five, i don’t think it will be there very long. 5.2%, i think investors will be all over, and it’s not something that will last in the market for a lock period of time.
>> what are you buying, selling.
>> we went into this with the durations in our port fole york a little less than the market duration, we have been duing in here, buying really at two points of the curve. it’s very interesting to buy in the two to three-year sectors of the curve, then to add duration by going out into the 10-year to 20-year portion of the curve, moving our durations out we think that related to or in line with buying longer data treasuries, investors are making a big play for dividend grow examining dividend paying stocks, that’s the other thing going on in the financial markets .
>> on the yield curve, are you hedging a little bit shorter end against the longer end.
>> what we’re trying to do, we really think you need to maximize income on fixed income portfolios on these days? so as we’re moving durations out by longer dated paper. i want to take advantage that we have the hump in the yield around the two to three portion, so we’re trying to bar bell it by buying into two to three year sex fors and move durations out. it’s the belly of the curve if you will, in the five-year to seven-year area.
>> thank you for joining us.
>> thank you. thank you, lori.
>> more when “after the bell” returns.
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Listen Market briefing --- Lori (slow)
Foreign investment --- Peter (slow)
National poll --- Linsey (slow)
and report on the economy signals expansion and perhaps higher interest rates. so at the closing bell, the dow is down almost four points today, the s&p off just about two points, 1287, the nasdaq closes at 2302, down 8.5 points. new york stock exchange is preparing to start electronic trading of more than 4,000 new corporate bond issues, part of the nyse’s effort to claim a charger share of the market . they expect s.e.c. approval in may and would begin trading in june. bonds were once a big portion of trading in june. expanding that is part of the c.e.o.’s strategy for increasing business. microsoft is asking u.s. federal courts to force ibm, oracle, sun microsystems and novell to open up records. it will help fight european regulator claims that it’s not complying with the 2004 antitrust order. the companies facing the threat of $2.4 million in daily antitrust fines. in the wake of the two dubai ports deal, members of congress want to tighten the rules for foreign companies buying u.s. assets. some business leaders worry major changes could lead foreigners to think twice about investing in the u.s. until two weeks ago, fixing the process was barely a slip on the congressional radar. bloomberg’s peter cook tells us, thanks to the port’s controversy, that’s changed.
>> even before the committee on foreign investment signed off on d.p. world’s takeover of six u.s. ports, law makers from both parties were calling for changes in the so-called process in the post-9/11 world.
>> it needs to be modernized and rewritten to ensure that congress plays a bigger role.
>> some of the ideas on capitol hill? require congressional notification of pending reviews, not just completed ones. require any deal of a company controlled bay foreign government to automatically face a more rigorous investigation. and move it to an agency views as less pro business many
>> they are the last group in the government that should be in charge of a national security function on foreign investment issues. because they kind of have a conflict between what their ideology is and what they are required to do under the statute.
>> james bodner participated in sfius reviews when he worked at the pentagon. he said minor charges might help, but given the congress ability to block deals would be a mistake.
>> i do worry if congress tried to use legislation to cause congress to have a veto power over this on a case by case basis it would have a chiling affect on foreign investment in the u.s., and that would potentially harm national security.
>> at the time when the u.s. needs to attract almost a trillion dollars to fund trade and current account deficits, some say additional barriers no foreign investment could do more harm than good.
>> the united states is the largest host and provider of foreign direct investment in the world. anything we do here, we better be ready to accept when other countries point it back at the united states.
>> bloomberg’s peter cook reporting. treasury officials defend their handling of the d.p. world case and the sfius process, but they are open to finding new ways to keeping congress in the loop. president bush’s public support is condition continuing its sharp slide. bloomberg’s linsey arnt has all of the details from washington.
>> the poll tells us a lot about what americans are thinking about when it comes to the economy and the nation’s security under the bush administration. boosh’s overall approval rating dropped to 38%, a five-point slide from last month according to the poll. 34% aprove of the president’s policies in iraq. that’s down seven points from last month. this followings an increase in violence as you know in iraq after the bombing of a shiite holy site last week, for the first time, a majority disaprove of the overall handling of the war on terror. that drop of support could be explained by the uproar over the dubai ports deal. just 17% say they aprove of the deal to hand over operations of six u.s. ports to the arab company. thomas man tells us that the deal is undermining a traditional bush strong hold.
>> however logical and rational the argument is for doing, americans reacted negatively, that has deeply junior mined president bush’s reputation for handling the war on terrorism, effectively.
>> now two other national polls out this week showed approval ratings in the mid 30’s, taken together, the numbers are making republicans in congress extremely nervous and thomas mann tells us that’s with good reason.
>> there are ample signs of a major backlash developing to the party of government, similar to the backlash that we saw in the 1949 election.
>> this survey has a margin of plus or minus three points, as is expected. what’s really important is that it shows how americans feel about our nation’s economy and security. lori.
>> thank you. we’ll shift our fork to us the bond market . 190450eu6 year note yield highest level in a year. what should do you if you are a bond investor? we’ll ask joe keating, when he joins us, next.
