The Pensford Letter - 2.11.13

JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.
com Leveling the Playing Field February 11, 2013 _______________________________________________________________________ Who says the federal government doesnt have a sense of humor? Last week, the US sued S&P for misleading investors. The US didnt sue Moodys or Fitch, and they basically issued the exact same ratings that contributed to the financial collapse in 2008. So why would the US government single out S&P...what separate S&P from the othersit couldnt be retaliation for the downgrade that S&P issued on the US last year, could it? No, that is just too blatant for even the US government, right? Rates continue to trade in a range, but that range is gradually shifting higher. Last year the common range was 1.45% - 1.75%. That has been replaced with 1.80% - 2.05%. Sequestration is next up to bat, but if that is resolved without damaging market confidence, the range could shift higher again. Since the Fed has turned us all into labor market forecasters, we thought wed include a handy online calculator courtesy of the Federal Reserve Bank of Atlanta. http://www.frbatlanta.org/chcs/calculator/ This calculator is great to disprove the folks who think that QE might end in 2013. Simply input the target unemployment rate and timeframe to see how many jobs need to be created each month in order to reach the target unemployment. In order for the UR to hit 6.5% by the end of 2013, wed need to add nearly 300k jobs per month and that assumes the participation rate remains constant. If hiring continues at its current pace, we should hit 6.5% in mid to end of 2015, which ties out nicely with the Feds timeframe of mid-2015 for ZIRP. Chicago Fed President Evans reiterated the same on CNBC Thursday, saying hes optimistic the economy is improving but that he expects QE will continue for at least another 6-12 months and ZIRP through at least mid-2015.
LIBOR Outlook RBS settled with regulators on its LIBOR manipulation lawsuit to the tune of $612mm. The focal point of the investigation was a 33 year old employee that submitted artificial LIBOR resets to help boost trading profit. Tom Hayes worked at RBS, then RBC, UBS and Citi. Citi hired him from UBS for $5mm per year, despite UBS trading management trying to keep him because his strong connections with LIBOR setters in London are invaluable. Mr. Hayes has indicated to the WSJ that this goes much higher than me. Know how we can guess that his actions were supported by the bank? He published Facebook updates regarding LIBOR. Fixed Rate Outlook Last week we chatted with a swap trader at a big bank who said that 30 year swap spreads will return to at least zero, or possibly positive, in 2013. Keep in mind that 30 year swap spreads have been negative since October 2008 except for a brief blip in January 2009. Thirty year swap spreads hit a low of negative 43.75bps in November 2008 and are currently trading at negative 15bps. Keep in mind that: Treasury + Swap Spread = Swap rate, so spreads pushing higher, even if Treasury yields remain constant, push your swap rate higher. One fundamental reason for an increase in 30 year spreads, aside from simple mean reversion, is swap desks needing to hedge Power Reverse Dual Currency notes. These PRDC notes are basically a cross currency swap, but are also linked to the USD/JPY fx rate. These notes were aggressively issued in 2006 2008. Investors in these notes are short a call on the entire note and, as USD/JPY goes higher, the likelihood that these notes will be called increases substantially. The result is that duration shortens and dealers have to pay fixed to shed this added duration. As swap dealers pay fixed, it forces swap rates higher, specifically on the long dated part of the yield curve. While these notes sound fancy, the basics are closely tied to mortgage hedging, or the hedging of any callable debt for that matter. This is just a reminder that technical trading factors that CNBC or the WSJ infrequently mention could push long term interest rates higher in the coming months. Its more convenient to blame NFP when in fact it might simply be traders hedging their positions.
This Week Much busier week ahead, with Wednesdays retail sales report giving us a sense of how much the increase in payroll taxes are effecting spending. There are also eight Fed speeches scheduled, headlined by Janet Yellens ambiguously titled A Painfully Slow Recovery for Americas Workers: Causes, Implications, and the Federal Reserves Response. St. Louis Fed President Bullard speaks on Wednesday and will likely reiterate his recent hawkish statement we should think about tapering or adjusting our program if data continues its positive trend. Moscow hosts a G20 meeting with currency manipulation as the headline. China is effectively closed for the week to celebrate its new year, eliminating the old standby excuse for rate movements of Asia! Italian elections in two weeks, things in Europe are starting to heat back up again
Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory capacity to you by providing the information herein. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax advice. The contents herein are the copyright material of Pensford Financial Group, LLC and shall not be copied, reproduced, or redistributed without the express written permission of Pensford Financial Group, LLC.
Economic Calendar
Economic Data Day Monday Tuesday 7:30AM 10:00AM 2:00PM Wednesday 7:00AM 8:30AM 8:30AM 8:30AM 8:30AM 10:00AM Thursday 8:30AM 8:30AM Friday 8:30AM 9:00AM 9:00AM 9:15AM 9:15AM 9:55AM NFIB Small Business Optimism JOLTs Job Openings Monthly Budget Statement MBA Mortgage Applications Import Price Index (MoM) Import Price Index (YoY) Advance Retail Sales Retail Sales less Autos Business Inventories Initial Jobless Claims Continuing Claims Empire Manufacturing Total Net TIC Flows Net Long-term TIC Flows Industrial Production Capacity Utilization U. of Michigan Confidence 0.2% 78.9% 74.7 0.8% -1.0% 0.1% 0.1% 0.3% 360k 3210k -2.00 -$3.50B 89.0 88.0 3676 -$27.41B 3.4% -0.1% -1.5% 0.5% 0.3% 0.3% 366k 3224k -7.78 $27.8B $52.3B 0.3% 78.8% 73.8 Time Report Forecast Previous
Speeches and Events Day Monday Time 6:00AM 1:00PM Tuesday 11:30AM 1:30PM 7:30PM Wednesday Thursday 11:10AM 10:30AM 12:50PM Friday 9:50AM Report Group of 30 release Global Economic Report Fed's Yellen speaks on Economy Fed's George speaks on the Economy Fed's Lockhart speaks Fed's Plosser speaks on Economic Outlook Fed's Bullard speaks on Economy Fed's Tarullo testifies before Senate on Regulation Fed's Bullard speaks on Economy Fed's Pianalto speaks on Economy Mississippi Fort Myers, FL Washington, DC Omaha, NE Madrid, Spain Stanford, CA Arkansas State University Place
Treasury Auctions Day Tuesday Wednesday Thursday Time 1:00PM 1:00PM 1:00PM 3-year Treasury 10-year Treasury 30-year Treasury Report Size $32B $24B $16B

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JP Conklin 704-887-9880 office jp.conklin@pensfordfinancial.com www.pensfordfinancial.

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