It's an action packed morning - already! The headlines were coming in well before 7 am screaming the news of more bank challenges. The effect on our Bond Market? Not pretty. Bonds are taking it on the chin by opening lower and still trading at their worst levels of the day.
•· HSBC stocks hit a 10 year low on capital fears. Deterioration in corporate bond leveraged loans this week increased the prospect of HSBC having to raise more capital to maintain their requirements.
•· Citigroup reported a net loss $8.29 billion citing decline in investments, lower mortgage servicing revenues, credit costs including credit losses and increases to loan loss reserves. Citigroup is being dissected and will realign into two businesses - Citcorp and Citi Holdings. Not sure yet which company will perform what.
•· Bank of America loses $1.79 billion on escalating credit costs, increases to reserves and significant write downs and losses in capital markets. Remember, this is the same Bank of America that bought Countrywide and Merrill Lynch and was throwing money all over the place.
•· And the REAL BIG Loser - Merrill Lynch, pummelled by the financial crisis, reported a loss $15.31 billion. Merrill's loses were not reflected in Bank of America's quarterly numbers.
More bailout on the way. The government announced a plan to inject $20 billion into Bank of America and to guarantee another $118 billion of losses. This guarantee is similar to the one Citi received late last year. Both transactions are in exchange for preferred stock. The funds come from the $700 Billion TARP (Troubled Asset Relief Program) fund which was put into place late last year.
Also in the news - consumer price index waddles in with the smallest increase in 54 years! This inflation data continues to illustrate the lagging economy and gives further question to the possibility of deflation.
On the heels of the CPI report, we got a read on December's industrial production...which has fallen and can't get up. Output has fallen in four out of the last five months. Capacity utilization, a gauge of inflationary pressures fell to their lowest level since December 2001.
With these super tame inflation reports (in a "normal" environment) would have led to a party for bonds. However, these aren't normal times and the fundamentals have taken a back seat. In fact, we are seeing money leave the safe haven of Bonds and make a move to Stocks.
And remember the Fed? Each Thursday they report on their purchasing plan. Yesterday they reported having purchased $23 Billion in Mortgage Backed Securities between Jan 8th and Jan 14th for a grand total of $33 billion. They have committed to purchase $500 billion by the end of June.
Today we see the Bond hanging out near a floor of support, further strengthened by the 25 day moving average just below. It would sure be nice to see a bounce off this floor, but the tame inflation numbers didn't cause a reaction...likely because the market already knows inflation is non-existent. The buying demand from the Fed should continue to help Bonds.