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[dcengr]

OPEC Dumps Treasuries at Fastest Pace Since 2003 on Oil Slide By Bo Nielsen and Daniel Kruger Jan. 22 (Bloomberg) -- OPEC nations are unloading Treasuries at the fastest pace in more than three years as crude oil prices tumble, sending bond yields higher. Exporters including Indonesia, Saudi Arabia and Venezuela, sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities in the three months ended in November, according to Treasury Department data. Members of the Organization of Petroleum Exporting Countries last sold Treasuries for three straight months in June 2003. Oil producers have surpassed Asian central banks as the largest pool of global savings, accumulating an estimated $500 billion in 2006 alone, according to research by Pacific Investment Management Co. The sales during those three months mark a reversal because OPEC countries have boosted their holdings of U.S. government bonds by 70 percent to $97 billion in the past 17 months, Treasury data show. ``There will be a significant sell-off,'' Joseph Stiglitz, a Nobel laureate and economics professor at Columbia University in New York, said in an interview. ``Medium-term and long-term yields will go up.'' Oil producers, including non-OPEC countries, have disclosed almost $200 billion of U.S. government, corporate and agency bonds, said Ramin Toloui, who helps manage about $641 billion for Newport Beach, California-based Pimco, a unit of Munich- based Allianz SE. The holdings are split about evenly between securities due in less than a year and those with longer maturities. Higher Yields Treasury 10-year note yields were unchanged at 4.78 percent last week, with the price of the 4 5/8 notes due in November 2016 finishing Jan. 19 at 98 26/32. Yields on two-year notes rose 4 basis points to 4.92 percent. A basis point is 0.01 percentage point. OPEC members are selling Treasuries because crude prices have declined 34 percent from a record high of $78.40 a barrel in July. They are reducing demand for U.S. government bonds at the same time as central banks from China to Romania say they want to reduce holdings of dollar-denominated assets. For every $10 drop in the price of a barrel of oil, OPEC members adjust Treasury holdings by about $34 billion, according to estimates by Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc. Selling that amount would raise yields by 0.05 percentage point, he said. Yields on the benchmark 10-year note have climbed 35 basis points from a 10-month low in December as economic data on housing and employment suggested the Federal Reserve would not cut its target rate for overnight loans between banks from 5.25 percent before June. Investing `Petrodollars' Short-term yields have remained above those on longer-term securities since mid-August. That situation, known as an inverted yield curve, has occurred only 11 percent of the time in the past two decades, according to Bloomberg data. Traders watch that difference because four of the past five recessions have been preceded by inverted yield curves. ``The pickup in oil revenues and the recycling of the petrodollars'' was one reason for 10-year yields falling as low as 4.33 percent last year, said George Goncalves, a fixed-income strategist in New York at Bank of America Corp. `Money to Invest' OPEC export revenue will decline by about $42 billion by the second quarter, from a peak of $126 billion in the third quarter of 2006 as oil prices tumble, according to estimates from commodity analysts at Charlotte, North Carolina-based Bank of America. Crude for February delivery fell $1 last week to $51.99 a barrel on the New York Mercantile Exchange. ``Lower oil prices mean less inflation pressure, but that doesn't seem to be going on,'' said Stiglitz of Columbia. ``The dollar has been subjected to a great amount of exchange-rate volatility, and it's not a good store of value anymore.'' OPEC countries increased holdings of U.S. government bonds by 115 percent from 2002 to 2006 when the price per barrel rose almost tripled, according to Treasury data. They still hold more Treasuries than in 2005, when oil prices jumped 41 percent. ``Oil prices are still high compared to the long-run average, and that leaves the oil-producing countries with money to invest in U.S. Treasuries,'' said Torsten Slok, an economist at Deutsche Bank AG in New York. Deutsche Bank estimates Middle East countries will stop investing in U.S. securities should oil decline to $30 a barrel. Oil averaged $33.28 a barrel for the 10 years ended in 2006. Foreign Reserves The oil exporters in the Middle East, Asia, Africa and South America bought an average of $2.5 billion of U.S. fixed- income securities in the 12 months ended in May 2005, when crude oil averaged about $42 a barrel, Goncalves said. Purchases jumped to $7.3 billion a month from June 2005 through August 2006, when oil averaged about $60 a barrel, he said. ``When you bring the oil price down, that's going to take a lot of excess money off the table,'' said Andrew Brenner, head of global fixed income for New York-based Hapoalim Securities USA, which has $70 billion under management. Only Japan, China and the U.K. own more Treasuries than the 12-OPEC nations, according to Treasury data released last week. The OPEC data doesn't include securities owned by Russia and Norway, which account for 40 percent of oil producer reserves, according to Toloui at Pimco. Central bankers in oil producers Venezuela, Indonesia and the United Arab Emirates have said they will invest less of their reserves in dollar assets. China, the second-largest holder of U.S. debt, also is cutting back holdings. The central bank, which owned $346.5 billion of Treasuries as of November, trimmed purchases by 1.7 percent in the first 10 months of 2006, Treasury figures show. ``The Chinese are slowing down their buying, so that leaves a big hole after the oil money,'' said Brenner at Hapoalim Securities.

[wyocowboy]

Although there is only a 41% correlation to treasuries, the junk market appears to be discounting a move lower in yields. I have been reading articles about the bubble in junk for 3 or more months now, yet they relentlessly move higher. When coupled with ECRI data that indicates a strengthening economy in the next 5 or 6 months, any move lower in stocks would seem to me to be purely a contrarian move due to overly bullish sentiment and would set up a good 20% or more move up in stocks. There seems to me to be an overload of data via the internet now, so I try to keep it simple (although that could also be because I am aging and unable to keep up). My view is when the 30 year bond yield is rising, it is competition for both stocks and real estate yields. With a current yield of 4.86, stocks are the best yield for the money (the 30 year mortgage rate is approximately 6%). Junk keeps moving closer and closer to the treasury rate, which tells me the economy is doing just fine..... The final judge is always price, so just set a stop at the point where you can't stand further loss, and you will do just fine. For some folks, that will be IBD's 7-8%, for others, the Zweig-Davis 4% model is the solution, and others may be able to tolerate up to 20% -(that is hard for me to say, because I could never tolerate a loss like that). Historical data is a wonderful thing, but it can lead you astray. A good example is Hussman -make no mistake, I think he is quite an intelligent man, and I have some money in his fund to hedge against myself,- but to say a PE of 18 is historically high is a mistake unless you compare it to historical bond rates. PE ratios have climbed in recent years because bond rates have dipped - money will seek the best yield. Many folks seem unable to grasp this simple concept of yield comparison, but it will keep you in the black over the long term. Simple thinking seems too easy, but if you think of it as a trading system, staying long will give you an approximate winning rate of 73%. The max drawdown is in your discretion -but if you were caught long in 87,(despite numerous warnings), your drawdown could be 25%. If you follow a simple risk control system like Tuffy, your max drawdown would be 7%. The best winning mechanical systems I have seen have a winning rate of 30-40% - the gains being far larger than the losses - but it requires a discipline and faith that is far beyond what most people are able to sustain, so it is not marketable to a "get rich now" crowd. I would welcome a sharp sell off - it will be a great opportunity to load up - unless, of course, others think the same - then I will wait till they wish to sell.....at a discount, of course.... For what it is worth, I am currently 50% long, and expecting a further downdraft at any time due to overly bullish sentiment. However, it looks like there may be some opportunities in biotech, defense, healthcare, and forest products (there is always a bull market somewhere), not to mention the relentless trend up in junk - FPA,FPB,PHK,DSU,PPT,COY, GSHIX,LMHYX,JAHYX,ABHIX,FAGIX,SAHYX,LBNDX and others.