INSIDE DEBT

PRODUCED BY REUTERS IN PARTNERSHIP WITH ICAP Friday, December 17, 2010

CHART OF THE DAY U.S. MARKETS TODAY

Build America bonds TODAY’S TOP STORY: Ratings agency Moody's gave an emphatic
Click on the chart for full-size image thumbs-down to Europe's efforts to resolve a debt crisis, slashing Ireland's
credit rating as EU leaders took no new action to prevent market turmoil
spreading. For more please click here

TREASURIES: Treasuries prices climbed, with long-dated bonds lead-

ing the way after the Federal Reserve bought long maturities as part of its
program to keep interest rates low to help an economic recovery.
The Fed bought $2.030 bln in Treasuries maturing from August 2028 to
May 2040, helping the 30-yr bonds advance 1-27/32 in price, its yield
falling to 4.43 pct from 4.54 pct.
10-yr notes rose 28/32 to yield 3.33 pct from 3.43 pct late on Thursday.
5-yr notes rose 13/32 to yield 1.95 pct and 2-yr notes were up 3/32 to
yield 0.61 pct.
2-10's part of the yield curve flattened by 7 bps while 2-30's flattened by
8 bps.

The popular bonds have gained an increasing share
of munis.
TODAY’S TOP NEWS
Irish debt downgraded as EU eschews crisis action
Grab bag of goodies in Obama's $858-bln tax plan
SEC sends more subpoenas in mortgage probe-
sources
U.S. House to vote to extend government funding -
Hoyer
U.S. faces tough future without Build America
Bonds
U.S. growth prospects look firmer as year end nears
Investors prep for rise in toxic U.S. home loan sales
Euro zone in trade surplus rises in October
EU agrees to longer bond maturities, haircuts-draft
UK banks told must restrain bonus payments
ECON WATCH
FOR MONDAY DECEMBER 20
FOREX: The euro declined for a second straight week against the dollar
and may extend losses after a multi-notch downgrade of Ireland's credit
rating affirmed the severity of the euro zone debt crisis.
Euro slid to a two-week low around $1.3133, with near-term support
seen at $1.3104, its 200-day moving average on EBS. The euro was
last down 0.42 pct at $1.318. On the week, the euro was down 0.2 pct,
although for the month of December, it was up 1.4 pct so far.
Euro hit a record low against the safe-haven Swiss franc around 1.2720
on EBS. It was last at 1.2792 francs, down 0.14 pct. Euro fell 0.5 pct to
110.65. The dollar was 0.07 pct weaker against the yen at 83.94 yen.
CORPORATES: Corporate bond spreads were mixed on a new view
that the economy would do better next year amid growing concerns on
the euro zone debt crisis.
The CDX.IG-15 index was unchanged at 86 bps.
Moody's downgraded Ireland by five notches to Baa1 from Aa2.
ConvaTec Healthcare sold $745 mln of senior unsecured notes.
STOCKS: The S&P 500 closed slightly higher to cling to a two-year
high, while investors predicted a pause in the days ahead, when volumes
are expected to dry up and after a 5 percent gain so far in December.
Dow dropped 0.06 pct to 11,492.67, S&P gained 0.09 pct to 1,243.95
and Nasdaq rose 0.21 pct to 2,642.97.
The VIX index earlier fell 10 pct and hit its lowest level since April. It
was last down 7.59 pct.
Oracle and RIM rose 3.94 pct and 1.62 pct respectively.
Barclays dropped 2.11 pct, KeyCorp climbed 4.08 pct and Regions Fi-
nancial rose 1.79 pct.

ET Indicators Unit Reuters Prior C & E: U.S. crude oil futures ended modestly higher on economic opti-
02:00 DE Producer prices mm % 0.3 0.4 mism after two closely watched indicators showed the recovery gathering
02:00 DE Producer prices yy % 4.5 4.3 steam, outweighing worries about euro zone fiscal debt.
04:00 EZ Current acc. nsa bln - -9.2 U.S. crude oil gained 0.40 pct to $88.05 per barrel.
04:00 EZ Current acc. sa bln - -13.1 Gold rose 0.37 pct to $1,375.5 an ounce.
04:00 EZ ECB Net invest flows bln - 7.0 Reuters-Jefferies index was up 1.03 pct to 320.62.
08:30 US National Activity Index ind - -0.28
08:30 CA Wholesale trade mm % 0.8 0.4  For MARKET SNAPSHOT click here
JP BoJ starts 2-day Monetary Policy meeting  For NEXT UP click here
 For DEEP DIVE click here
INSIDE DEBT December 17, 2010

MARKET SNAPSHOT as of 3:00 pm EST

TREASURIES <5> <500> EQUITIES

BID ASK YIELD CHANGE INDEX CHANGE
1-Mo Bill 0.065 0.03 0.066 -0.018 DJIA 11498.15 -1.10
3-Mo Bill 0.115 0.105 0.117 -0.016 NASDAQ 2648.60 11.29
6-Mo Bill 0.175 0.165 0.178 -0.003 S&P 500 1245.53 2.66
1-Year 0.295 0.275 0.300 -0.007
2-Year 99.789 99.820 0.610 0.078 COMMODITIES
3-Year 99.273 99.305 0.998 0.141 PRICE CHANGE
5-Year 97.289 97.336 1.953 0.359
NYMEX 88.1 0.4
7-Year 97.281 97.328 2.682 0.656
BRENT 91.3 0.2
10-Year 94.109 94.172 3.328 0.828
SPOT GOLD 1377.1 6.6
30-Year 97.484 97.547 4.402 2.172
PALLADIUM 739.5 3.0
IR SWAPS <19901>
SPREAD RATE EURODOLLAR FUTURES
2-Year 20.25 24.25 0.80 0.83 CLOSE CHANGE
REPURCHASE AGREEMENTS 3-Year 25.75 29.75 1.25 1.27 Jan-11 99.67 0.00
G/C MORTGAGE REPOS 5-Year 19.50 23.50 2.14 2.15 Mar-11 99.59 0.02
O/N 0.310 O/N 0.300 7-Year 13.75 17.75 2.81 2.81 Jun-11 99.48 0.05
2-Week 0.290 2-Week 0.290 10-Year 7.75 11.75 3.40 3.39 Sep-11 99.34 0.07
1-Month 0.290 1-Month 0.300 30-Year -30.00 -26.00 4.10 4.08
3-Month 0.300 3-Month 0.350
U.S. Interest rate swap—yield curve FUTURES
AGENCY REPOS i-REPOSM INDEX
PRICE CHANGE
O/N 0.300 10:00 AM
CBOT 5 yr 118.67 0.52
2-Week 0.310 3:00 PM 0.250
CBOT 10 yr 120.42 -1.28
1-Month 0.310 0.244
CBOT 30 yr 121.31 -2.09
3-Month 0.340

EURODOLLAR DEPOSITS & OIS STRIPS CURRENCIES

(ASKED) BID ASK
BID ASK BID ASK Euro 1.3171 1.3174
O/N 0.220 0.240 - - Sterling 1.5507 1.5512
1-Month 0.260 0.320 0.174 0.184 SM JP Yen 83.87 83.90
NYFR - 10AM FED FUNDS
3-Month 0.290 0.390 0.177 0.187 Open 0.2200 Swiss Franc 0.9687 0.9690
1m 0.2624
6-Month 0.450 0.550 - - High 0.2500 Can Dollar 1.0111 1.0116
3m 0.3421
12-Month 0.780 1.050 0.242 0.252 Low 0.1200 Mexico 12.4085 12.4136

ACTIVE FANNIE MAE AGENCIES ACTIVE FREDDIE MAC AGENCIES

TERM COUPN MATURITY YIELD-SPREAD YIELD TERM COUPN MATURITY YIELD-SPREAD YIELD
2-Year 0.625 28/12/2012 12.25 9.25 0.725 2-Year 0.375 28/12/2012 13.25 10.25 0.735
3-Year 0.75 18/12/2013 20.75 17.75 1.2 3-Year 0.875 28/10/2013 12 9 1.112
5-Year 1.625 26/10/2015 25.25 22.25 2.2 5-Year 1.75 10/09/2015 19.5 16.5 2.143
7-Year - - - - - 7-Year - - - - -
10-Year - - - - - 10-Year 3.75 27/03/2019 1 -2 3.334
30-Year 6.625 15/11/2030 24.5 21.5 4.645 30-Year 6.25 15/07/2032 25.5 22.5 4.655

Active MBS 15YR Wrightson ICAPSM Chart of the Day

CPN BID ASK YIELD
FNMA 4.0 102.1700 102.1800 3.214
FHLMC 4.0 102.1730 102.1770 3.211

Active MBS 30YR

CPN BID ASK YIELD
FNMA 4.0 98.2920 98.2960 4.195
FHLMC 4.0 98.2200 98.2200 4.246
GNMA 4.0 99.3020 99.3060 3.997

2
INSIDE DEBT
TODAY’S TOP NEWS
Irish debt downgraded as EU eschews crisis action
Ratings agency Moody's gave an emphatic thumbs-down to
Europe's efforts to resolve a debt crisis, slashing Ireland's credit
rating as EU leaders took no new action to prevent market tur-
moil spreading.
Moody's cut Ireland's rating by a stunning five notches during a
EU summit meant to restore confidence in the euro zone by
creating a permanent financial safety net from 2013 and vowing
to do whatever it takes to protect the euro.
Moody's cut Ireland's rating to Baa1, three notches above junk,
with a negative outlook from Aa2 and warned further down-
grades could follow if Dublin was unable to stabilize its debt
situation, caused by a banking crash after a decade-long prop-
erty bubble burst. The blow to investor confidence came as the
27 leaders failed to agree any specific measure to stop conta-
gion spreading from Greece and Ireland, which have received
EU/IMF bailouts, to other high-deficit countries such as Portugal
and Spain. Leaders spurned calls for immediate practical steps
such as increasing the size of a temporary bailout fund or allow-
ing it to be used more flexibly to buy bonds or open credit lines
before troubled countries are shut out of the credit markets.
SEC sends more subpoenas in mortgage probe-sources
U.S. regulators have opened a new line of inquiry in their mort-
gage foreclosure probe and are asking big Wall Street banks
about the beginning stages of mortgage securitization, two
sources familiar with the probe said.
SEC launched the new phase of its investigation by sending out
a fresh round of subpoenas last week to big banks like Bank of
America, Citigroup, JPMorgan Chase, Goldman Sachs Group
and Wells Fargo, the sources said. The SEC's subpoenas focus
on the earliest stage of the mortgage securitization process,
said the sources, who requested anonymity because the probe
is not public. The sources said the SEC is asking for information
about the role of so-called "master servicers" -- specialized firms
that oversee the selection and maintenance of the large pool of
home loans that go into every mortgage-backed bond.
One of the sources said the SEC is seeking information about
the role banks had in mortgage securitization. The regulator is
also looking at the role trustees for the trusts that issued the
mortgage-backed securities had in monitoring the performance
of the underlying loans.
U.S. faces tough future without Build America Bonds
U.S. state and local governments face a surge in borrowing
costs after lawmakers refused to renew the federally subsidized
Build America Bonds program used to fund projects and create
jobs.
The $2.8 trillion municipal bond market also faces depressed
prices and greater volatility due to the loss of taxable BABs,
which made up more than a quarter of all new municipal debt
sold this year and which have been largely attributed with re-
starting stalled municipal credit markets.
Issuers like California receive federal rebates equal to 35 per-
cent of the bonds' interest costs. And most issuers hoped the
program, which debuted in April 2009, would be extended for a
year or two beyond its Dec. 31 expiration. But an extension
failed to make its way into a tax bill passed by Congress this
week. As prospects for a continuation of BABs dimmed over the
last few weeks. Separately, legislation laying out how the U.S.
government will fund surface transportation projects could pro-
vide a vehicle for bringing Build America Bonds back after they
expire at the end of this month.
3
December 17, 2010
Grab bag of goodies in Obama's $858-bln tax plan
U.S. President Barack Obama's $858 billion tax package is a
grab bag of goodies for investors, the affluent and workers, but
the richer you are the more you get.
The top 20 percent of taxpayers will see a 5.7 percent boost in
after-tax income, while the bottom 20 percent get a 3.7 percent
boost, according to the Tax Policy Center, a think tank.
A tax on gifts typically paid by the wealthy will stay at 35 per-
cent, its lowest rate since the Depression, instead of rising as it
would have under current law. A couple with two children and
cash income of about $300,000 saves about $8,000 by extend-
ing the current rates, compared to what they would have owed if
the rates expired, according to the Tax Policy Center.
These figures, however, do not include the breaks on invest-
ment income. The law freezes for two years the top two income
tax rates at 33 percent and 35 percent, preventing a jump to 36
percent and 39.6 percent where they had been headed. To be
sure, the low and middle income groups do benefit. They'll see
a cash boost from cuts in the payroll tax -- which fund the Social
Security retirement system -- with the rate trimmed from the
current 6.2 percent to 4.2 percent. The wealthy also get that
benefit, but the payroll tax is not imposed on income above
$107,000. Extension of the $2,500 college credit and another
child tax credit will help lower income groups more, as they
phase out by income. Eight million students take advantage of
the college credit, according to the White House. Two big boons
for business are a new write-off of 100 percent of investments
immediately and prevention of the dividend rate from jumping to
40 percent. For an interactive graphic on taxes, deficit and fiscal
stimulus, click here
U.S. House to vote to extend government funding - Hoyer
The House of Representatives will vote on a measure to extend
government funding through Dec. 21 to avoid a government
shutdown, House Democratic Leader Steny Hoyer said.
The Senate is still negotiating a measure that would extend
current fiscal year funding beyond Saturday at midnight, when
funding expires.
Lawmakers have failed to pass a budget for the current fiscal
year, which started Oct. 1, and thus have extended last year's
budget to fund the operation of everything from nuclear subma-
rines to national parks. Senate Democrats had hoped to pass a
detailed, $1.1 trillion spending bill to cover the rest of the fiscal
year, but they abandoned that effort on Thursday night in the
face of unified Republican opposition.
Republicans want to extend current funding through January,
when they will take control of the House and hold a larger num-
ber of seats in the Senate.
U.S. growth prospects look firmer as year end nears
The U.S. economy is gathering steam as the year draws to a
close, boosting optimism about prospects in 2011, according to
measures published by two separate economic research firms.
The Conference Board's measure of leading economic indica-
tors jumped 1.1 percent in November, the biggest rise since
March and the fifth straight monthly gain.
Separately, ECRI said its gauge of future growth rose to its
highest level since May. It was the latest evidence of steady, if
erratic, improvement in the economy's prospects after a sum-
mer lull. U.S. GDP grew at a 2.5 percent annual rate in the third
quarter, but that was not enough to bring down the jobless rate,
which rose to 9.8 percent in November. Still, the rosier outlook
from key indicators offered a bright spot.
INSIDE DEBT
TODAY’S TOP NEWS
Investors prep for rise in toxic U.S. home loan sales
Trading in toxic mortgage loans will likely jump in 2011 as more
banks unload the assets, with large investors such as The Car-
lyle Group joining others already entrenched in the market, in-
vestor sources said.
Industry chatter has volumes nearly doubling in 2011 to about
$20 billion, according to Jason Kopcak, head of whole loan trad-
ing in New York at Cantor Fitzgerald, which brokers the sales of
distressed assets. While volumes represent a fraction of the 5
million of troubled home loans, a pickup would be a meaningful
step in resolution of the housing crisis, analysts say.
As sellers offer steep discounts and the loans are not tied up in
bonds, buyers say they have greater flexibility for work-outs
such as short sales or deeds-in-lieu of foreclosure, or to fore-
close.
But with a housing bottom in sight, opportunities are attracting
new players to the "non-performing loan" market dominated by a
few investors, which include Arch Bay Capital and Kondaur
Capital. Private equity firm Carlyle Group has recently shown its
hand in funding trades, or bidding directly, two sources said.
Euro zone in trade surplus rises in October
The euro zone's trade surplus rose in October even though ex-
ports grew marginally slower than imports, data showed, boding
well for the next trade contribution to economic growth in the last
quarter.
Eurostat said the seasonally unadjusted trade surplus of the 16
countries using the euro with the rest of the world rose to 5.2
billion euros ($6.92 billion) in October from a downwardly re-
vised 2.6 billion surplus in September and a 4.8 billion surplus in
October 2009. Both exports and imports growth slowed in Octo-
ber compared to the previous month, but still remained strong
with exports up 20 percent against the previous year and im-
ports up 21 percent. In September both grew 22 percent year-
on-year. Adjusted for seasonal swings, the trade surplus was
3.6 billion euros in October, up from 2.0 billion in September as
exports edged 0.1 percent lower month-on-month while imports
fell 1.3 percent. Data showed that in the January-September
period the euro zone's biggest economy Germany was the main
export engine producing a trade surplus of 113.5 billion euros,
up from 97.9 billion in the same period of 2009.
NEXT UP
Americans not so optimistic about 2011, poll says
Americans are ringing out 2010 on a worried note, feeling grim
about the job market, the cost of living and their retirement sav-
ings, according to a poll released.
Three-quarters of those surveyed are dissatisfied with national
conditions, and nearly half fear the economy will take a long
time to recover, according to the poll by the Pew Research Cen-
ter for the People & the Press.
Nearly nine in ten describe U.S. economic conditions as poor or
fair, it said. However, the number of people calling conditions
fair, rather than poor, has risen slightly since October.
Looking ahead, 55 percent think 2011 will be better than this
year, and 31 percent say the coming year will be worse.
That's more pessimistic than a year ago, when 67 percent
thought 2010 would be better than 2009, it said.
Almost half, or 48 percent, said it will be a long time before the
economy recovers, while a third predicted it will recover soon,
the survey said.
4
December 17, 2010
EU agrees to longer bond maturities, haircuts-draft
EU leaders have agreed to try to lengthen the maturities of new
sovereign bond issues and have confirmed private investors'
involvement in the future euro zone rescue mechanism, a draft
summit statement showed.
The draft confirmed that the permanent euro zone rescue
mechanism, to be launched in mid-2013, would open the possi-
bility of private sector investors taking a loss in the event of a
sovereign debt restructuring.
It said all new bonds issued in the euro zone from June, 2013
would carry collective action clauses (CACs) which allow a
specified majority of bond holders to overrule minority ones
when seeking a debt restructuring deal with the sovereign.
The draft added the CACs would be modeled on existing ones
in the United States and Great Britain.
It also confirmed that any debt restructuring process would be in
line with current practices of the IMF.
UK banks told must restrain bonus payments
Britain fell in line with the rest of the EU in introducing the
world's toughest bank bonus curbs as politicians and the BoE
stepped up pressure on lenders to rein in payouts.
FSA published an updated remuneration code that will affect
2,700 financial firms it regulates from January just as the 2010
bonus round is underway.
The BBA responded by saying the sector contributes chunky tax
revenues to the UK treasury and the country's banks should not
be put at a competitive disadvantage to rivals outside Europe.
There were no major surprises in the revised code, but it ce-
ments a shifting mood.
Lawyers saw some wriggle room, however. As with the CEBS
rules, staff at low-risk firms like small banks and building socie-
ties could escape the more draconian rules.
Britain's ruling coalition sent out mixed signals. The deputy
prime minister warned banks the government will not remain
neutral if banks fail to cut this year's bonus payments or in-
crease lending to small companies.
Separately, Nationwide Consumer Confidence index fell 7
points to 45 in November, its fourth consecutive fall and the
lowest since March 2009.
Four out of five people said jobs in their communities are hard
to come by, and two out of three say jobs in their line of work
are difficult to find, it said.
Almost half said they or someone in their household has been
without a job and looking for work in the past year.
Nevertheless, two-thirds of working people said their employers
are in excellent or good financial health.
While 57 percent said it is difficult to afford the things they really
want, 40 percent said it is easy.
Two thirds said it is difficult to save for retirement.
Asked to assess their personal financial situation, 40 percent
said fair, 30 percent said good, 23 percent said poor, 5 percent
said excellent and 2 percent did not know.
About a quarter said they owe more than they can afford on
credit cards and other non-mortgage debts.
The national poll was conducted Dec. 1-5 by telephone among
1,500 adults. The margin of error was plus or minus 3 percent-
age points, Pew said.
INSIDE DEBT
DEEP DIVE Commentary and Analysis
FACTBOX
Key components of Obama's tax bill
The U.S. Congress approved an $858 billion tax deal between
President Barack Obama and the Republicans that will boost
the economy but add to the budget deficit.
Following are key components of the bill. All cost estimates are
from the congressional Joint Committee on Taxation and for a
10-year period unless noted.
INDIVIDUAL INCOME, INVESTMENT TAXES
Extends tax rates for all income groups, including the wealthiest
2 percent, which Obama had originally opposed.
Cost of keeping tax rates for the middle and lower income
groups: $127 billion. Cost to retain the top two income tax rates
Obama originally opposed: $61 billion.
Keeps capital gains and dividends taxed at a top rate of 15 per-
cent. Obama and Democrats had sought a 20 percent top rate.
Cost: $54 billion.
Repeals certain limitations on deductions for high-earning indi-
viduals. Cost: $21 billion.
Extends a $2,500 annual college tax credit, favored by Obama,
for two years. Cost: $18 billion.
Extends a $1,000 child tax credit, which phases out at higher
incomes, for two years. Cost: $72 billion
Boosts earned income tax credit, which benefits low-earning
working individuals. Cost: $12 billion
ESTATE TAX
Obama conceded to Republican demands on the estate tax --
35 percent after a $5 million individual exemption.
That level was originally pitched by Republican Senator Jon Kyl.
Obama and Democrats had wanted to renew the tax at 2009
levels of 45 percent rate with a $3.5 million exemption level. The
estate tax expired this year. Cost: $68 billion.
UNEMPLOYMENT INSURANCE
The bill extends long-term unemployment insurance for 13
months, without a requirement that it be paid for immediately as
Republicans have demanded.
Two million people by the end of the year will lose their benefits
if the benefits are not extended, according to the National Em-
ployment Law Project, a workers' rights group.
Jobless benefits usually expire after six months, but since the
recession took hold in 2007 Congress has voted to extend them
for up to 99 weeks.
Cost: $57 billion, according to the Congressional Budget Office.
ALTERNATIVE MINIMUM TAX
The bill amends the alternative minimum tax by indexing it to
inflation to prevent more than 20 million middle-class taxpayers
from getting hit with the tax, intended to ensure the wealthy pay
some income taxes.
Cost: $137 billion.
EXPENSING FOR BUSINESS
Lets businesses of all sizes write off investments faster in 2011.
This benefits capital-intensive companies the most.
Cost: $21 billion.
PAYROLL TAX CREDIT
Employers and workers each pay a 6.2 percent payroll tax,
which funds Social Security. The bill lowers the rate for workers
to 4.2 percent for one year.
The Social Security Trust Fund would be paid back by a transfer
of general funds.
Cost: $111 billion.
5
December 17, 2010
ADDITIONAL INDUSTRY TAX BREAKS
Extends a 45-cent-per gallon tax credit for ethanol for one year
and a 54-cent tariff on imported ethanol. Cost: $7 billion.
Revives for 2010 and extends a research and development tax
credit to 2011. Cost: $13 billion for two years.
FACTBOX
End of U.S. stimulus plan and municipal bonds
When the U.S. Congress passed the $814 billion economic
stimulus plan in 2009, it included a bevy of measures to help a
municipal bond market that froze at the end of 2008 begin func-
tioning again.
When the stimulus plan ends on Dec. 31, many of the munici-
pal bond market measures expire.
Here are the most notable ones:
Direct-Pay Bonds, taxable debt which pay states, local govern-
ments and other bond issuers federal rebates.
The biggest program was Build America Bonds, intended for
infrastructure projects and paying a rebate equal to 35 percent
of interest costs.
Recovery Zone Bonds paid a higher subsidy of 45 percent and
could be issued by areas hit hard by the recession. There was a
limit on how much issuers could sell, and so they had less im-
pact than BABs.
School construction bonds, capped at $11 billion, provided a
rebate close to 100 percent. These were introduced as tax
credit bonds, which give investors credits on their taxes in lieu
of interest payments, and later changed to the direct-pay model.
Small issuer limit for bank-qualified bonds
The limit on how many bonds issued by small communities and
nonprofits that banks could hold was temporarily raised, boost-
ing demand for the debt.
Alternative Minimum Tax exemption
Interest paid on private-activity bonds, which are issued to fi-
nance facilities that fall out of the purview of typical public
works, was exempted from calculations to determine if a bond-
holder had to pay the Alternative Minimum Tax.
Federal Home Loan Banks
Federal Home Loan Banks, a group of cooperatives helping
provide financing for economic development and housing, were
allowed to issue letters of credit for tax-exempt debt, creating a
source for guaranties after the municipal bond insurance indus-
try broke down.
Diffident investors miss silver linings in U.S. economy
By Krishna Kumar
The signs of a stronger U.S. economic recovery keep multiply-
ing, and yet diffident investors appear more fixated on the well-
known negatives surrounding the economy -- high unemploy-
ment and a moribund housing market.
To name a few: U.S. retail sales rose for a fifth straight month in
November, the October trade report pointed to an improving
export picture, the ISM manufacturing survey has posted good
gains, continuing jobless claims are near a two-year low and
consumer confidence at a six-month high.
So the surprise, at least in the first half of 2011, could be for a
stronger-than-expected U.S. recovery leading to a sustained
rise in the dollar as well as U.S. stocks.
Markets may finally move away from the schizophrenic risk on/
risk off trading mentality, instead rewarding countries with good
INSIDE DEBT
DEEP DIVE Commentary and Analysis
growth prospects.
With the perennial problems in Europe, the euro emerges as the
obvious candidate to buy the dollar against, with the Japanese
yen offering the next best choice.
The good U.S. data, combined with the extra stimulus that the
budget deal is expected to generate, analysts have been busy
revising up GDP forecasts to show growth of more than 3 pct
for 2011.
The nascent recovery in the United States comes at a time
when the major emerging market economies seem to be gaining
a second wind. Data published by China last weekend showed
impressive growth momentum in November.
The spectacular rise in U.S. Treasury yields recently seems to
affirm this point, with 10-year yields having soared more than a
percentage point from the October lows to as high as 3.568
percent.
But instead of attributing the rise as a natural outcome from an
improving economic outlook, investors have grasped for other
explanations.
They point to the lack of budget discipline in the United States
leading to a widening of the deficit, inflationary fears due to
loose monetary and fiscal stimulus and fears the Federal Re-
serve may not be done with quantitative easing after QE2.
While these explanations appear plausible, investors may be
better off in simply accepting the fact that the U.S. economy is
indeed on a mend.
Though the Fed statement on Tuesday left policy setting un-
changed, there was a modest and cautious upgrade to the eco-
nomic prospects.
Investors have been so burned by the financial crisis and econ-
INSIDE DEBT is produced by Reuters in partnership with ICAP.
(Compiled by Pronita Naidu and Mowna Ravikumar in Bangalore)
For questions or comments about this report, email us at:
inside.debt@thomsonreuters.com
or contact Chandra Ramarathnam on +91 80 4135 5899
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December 17, 2010
omy's struggles over the past three years that they may not be
seeing the recovery building momentum, similar to how Asia's
rebound from its crisis in 2003 was initially missed.
For euro/dollar in the medium term, this week's failure to sus-
tained a break above the 38.2 percent retracement of the
$1.4283-1.2969 decline should lead to consolidation in a
$1.3165-1.3500 range.
There's a very slim chance of euro/dollar reaching $1.3625, the
50 percent retracement, before heading lower to test $1.2969,
the November low, en route to the August/September lows at
$1.2585-1.2642.
Only a move above $1.3786, the 61.8 percent retracement and
the Nov. 22 high, would spark a retest of the November peak at
$1.4282.
In the longer term, as the euro holds below $1.4371/4470 -- the
76.4 percent retracement of $1.5141-1.1875 slide and falling
downtrend line -- the euro has every chance of breaking under
the $1.1875 low of 2010 and trading towards $1.1100/1300.
Investors still skeptical of the U.S. economy and the dollar may
chose to sell the euro against the Australian dollar, which cuts
the risk of a sustained U.S. downturn.
The Australian dollar is a natural beneficiary of a growing global
economy, thanks to its links to China and its burgeoning trade
with India.
The euro/Aussie downtrend looks to be well-entrenched in
2011.
-- Krishna Kumar is a Reuters FX analyst. The views expressed
are his own --
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