'But I spoke to your colleague about that very bond,' I said. 'She said you had it in your portfolio.'
'She must have been mistaken. She probably confused it with another Tremont Capital bond. In any event, we view the contents of our portfolio as highly confidential information which we never disclose. I have just reminded my colleague of that. Now goodbye, Mr Murray.'
As I put down the phone I felt sorry for the friendly Swiss girl. I was sure she had not enjoyed being reminded of her duties by Herr Dietweiler. A nasty piece of work. And not a good liar. There were no other Tremont Capital bonds. Harzweiger Bank owned the same bonds we did.
But why didn't they admit it?
This was serious. There was a good chance that De Jong had lost $20 million. Unless we found the money, it could cripple the firm. I supposed that we would not be legally bound to recompense our clients whose money we had lost, but I was sure they would not remain our clients for much longer. I had to tell Hamilton what I had discovered. He wasn't at his desk. Karen said he was out all afternoon and wouldn't be in until late the next morning.
He came into work at lunchtime the next day. I watched him go over to his desk, take off his jacket and turn on his screens. He sat down in front of them and stared.
I strode over to his desk. 'Excuse me, Hamilton,' I said, 'have you got a minute?'
'It's now one twenty-seven. The unemployment figures come out at one thirty. I have three minutes. Will that be enough?' he asked.
I hesitated. What I had to tell him was important. But I didn't want to rush it. If Hamilton said he only had three minutes, he only had three minutes. 'No, I'm afraid it will take a little longer,' I said.
'In that case, sit down. You might learn something.'
Stifling my impatience, I did as he said.
'Now tell me what's been happening to the treasury market.' Hamilton meant the market for US government bonds, the biggest, most liquid bond market in the world, and the one that most investors use to express a view on long-term interest rates.
'It's been going down for the last month,' I said, 'people are looking for yields to go higher.' As treasury prices fall, their yields go up, reflecting an expectation of higher interest rates in the future.
'Why has it been going down?'
'Everyone is frightened that the US may have reached full employment. Last month's unemployment figures were 5.2 per cent. Most economists think that it will be impossible for unemployment to get much below 5 per cent and that once it gets down to that level inflationary pressures will build up in the system. It will get more difficult for businesses to find workers, and so they will have to pay higher wages. Higher wages mean higher inflation, which means higher interest rates. So treasury prices go down.'
'So what's going to happen after the figure?' Hamilton asked.
'Well, the market expects that the unemployment number will be down to 5 per cent. If that happens, lower unemployment will mean higher inflation. The market will sell off yet again.'
It always seemed to me ironic that what was good for jobs was bad for the bond market. I could remember the day I had been on the trading floor of one of the big brokers. On the announcement that a few thousand more people had lost their jobs than expected, a huge cheer had risen round the room, and the treasury market had roared ahead. Talk about an ivory tower!
'You are right that nearly everyone thinks that the number will be 5 per cent and that the market should sell off. So what should I do about it?' Hamilton asked.
'Well if we had any treasuries left, we could sell them,' I said. 'But since we sold what we had a month ago, I suppose we can just sit and watch.'
'Wrong,' Hamilton said. 'Or at least you can sit and watch.'
The green television screen in front of us showed where the market was trading at that instant. A dense array of little green numbers winked as bonds were bought and sold, and prices changed. The key treasury bond we were looking at was the thirty-year bond otherwise known as the 'long bond'. Its current price was 99.16, meaning 99 and sixteen thirty-seconds, or 99 and a half.
With one minute to go until the release of the figure, the green numbers stopped winking. Nothing was trading. Everyone was waiting.
The minute seemed to last for ever. All over the world, in London, New York, Frankfurt, Paris, Bahrain, even Tokyo, hundreds of men and women were sitting hunched in front of their screens, waiting. The bond futures pit on the floor of the Board of Trade futures exchange in Chicago would be silent, waiting.
A muffled beep came from our Reuters and Telerate screens. A second later a little green message flashed up, 'US July unemployment rate falls to 5.0 per cent versus 5.2 per cent in June.'
Two seconds after that the number 99.16 by the long bond flashed to be replaced by 99.08, meaning 99 and eight thirty-seconds, or 99 and a quarter. I was right. It was a bad number and the market was falling.
Two more seconds, and our phone board was dotted with flashing lights. The salesmen did not know what Hamilton was thinking but they knew he was thinking something.
Hamilton picked one up. I was listening on the other line. It was David Barratt.
'I just wanted to let you know our views on…' he began.
'Offer me twenty million long bonds,' Hamilton cut in.
'But our economist thinks…'
'I'm glad you have an economist who thinks. Now get me that offer!'
David shut up, and went off the line. He was back five seconds later. 'We would offer them at 99.04. Watch out, Hamilton, this market is crashing off!'
'I'll buy twenty at 99.04. Bye.'
The green number by the long bond on our screen was flashing constantly. It now read 99.00. I didn't know what on earth Hamilton was doing but I knew he knew exactly what he was doing.
Hamilton picked up the next line. It was Cash. 'Offer me thirty million long bonds.'
Cash didn't argue. Someone wanted to buy thirty million bonds in a falling market, that was fine with him. 'Our offer is 99.00.'
'Fine, I'll take them,' Hamilton said. He put down the phone and stared at the winking screen intently. So did I.
The price kept flashing, but it was no longer plunging straight down. It was wobbling between 99.00 and 99.02. Hamilton and I sat motionless in front of the screen. Every time the number 99.00 flashed, I found myself holding my breath, expecting to see 98.30 follow it. We could lose a lot of money on a fifty-million-dollar position. But the 99.00 level held. Suddenly it flashed up at 99.04, then 99.08. Within seconds the price had moved up to 99.20.
I exhaled. Hamilton had done it again. We had managed to buy fifty million long bonds at what appeared to be the lowest prices for months. And it looked like the market was going back up. I studied Hamilton closely. He was still staring at the screen. His expression was unchanged. He wasn't smiling, but I thought I could detect a slight relaxation of his hunched shoulders.
The price flashed up to 100.00.
'Shouldn't we sell now?' I asked.
Hamilton slowly shook his head. 'You don't know what is happening here, do you?' he said.
'No, I don't,' I said. 'Tell me.'
He leaned back on his chair and turned to me. 'You have to be one step ahead of what the market is thinking,' he said. 'Market prices move when people change their minds. The market will go down if people suddenly decide that they would rather not buy or hold bonds, they would rather sell them. This often happens when there is a new piece of information. That's why the market often moves when an economic figure is released. Are you with me?'
'Yes,' I said.
'Now, over the last couple of months a lot of people have been changing their minds, deciding to sell. As each piece of bad news has come out, more and more people have sold, driving prices ever lower. The situation has got so bad that by this week everyone expected more bad news and a further fall in the market.
'When the bad news came out, it was just what people had expected. Sure, the dealers moved their prices down, but all the sellers had sold long before. Like we did a month ago. There were no sellers left.'
'OK, that explains why the market didn't go down for more than a minute or so, but why is it going up?' I
