Bond Expert: Friday Outlook

Prices of Treasury coupon securities are surging in overnight trading as fears of a global recession spark a meltdown in global equity markets and a massive deleveraging trade. The moves in the various financial markets are stunning and frightening. For a reference point I am starting this piece at 600AM New York time. There is an expression in Latin, “red ipsa loquitur” which means literally “the thing speaks for itself” and this morning the numbers truly do. There is no need to comment.

The yield on the benchmark 2 year note has plummeted 20 basis points to 1.41 percent. The yield on the 5 year note has dropped 15 basis points to 2.48 percent. The yield on the 10 year note has dropped 16 basis points to 3.52 percent. The yield on the 30 year bond sits at 3.88 percent.

The 2 year/10 year spread has widened to 211 basis points.

The 2 year /5 year/30 year butterfly which traded earlier this week at 57 basis points is 33 basis points.

Equity markets are plunging around the globe and the outlook is grim.

The Nikkei dropped nearly 10 percent and is at levels last seen in April 1983. Toyota sales fell for the first time in 7 years and Sony slashed its forecast for a second time.

The South Korean Kospi index tumbled 10 percent and is down 20 percent for the week.

The Hang Seng fell about 8 percent.

European stocks are down 6 percent to 8 percent. The UK reported that its economy has contracted 0.5 percent from Q2 which is more than paid professional prophets, pundits, and, prognosticators had less than presciently predicted.

Daimler slashed its profit forecast for the year and Fiat said that it will cut production in Q4.

An index of European manufacturing and service activity dropped to 44.6 from 46.9 and that is the lowest level for that index since its inception in 1998.

Dow futures are down 550 points and the S&P futures are down 60. Each is down limit and can not move lower until the exchanges open at 930AM New York time.

Movements in the currency market are on an order that I can not recall. The yen has strengthened against the dollar to about 92 yen from nearly 97 yesterday. The euro has fallen to below $1.26 from $1.29.

Commodities are participating in the panic plunge. Gold has dropped below $700 and oil is trading $62.

This is certainly shaping up as an historic day.

Long Bond (7:20 AM)

As a matter of historical record it is noteworthy that the yield on the Long Bond trades with a yield of 3.88 percent this morning. In one of the previous iterations of this crisis it traded to a 3.90 yield. So the level we touched this morning is certainly the lowest yield on the Long Bond in the last 30 years.

As I write this I recall that it is almost exactly 30 years to the date that the 30 year bond reached its all time high yield.

When the Treasury announced the November 1981 refunding package I am certain that I recall the WI (when issued) Bond trading at 15.50 percent. The market rallied dramatically and when the auction took place that bond became the 14.00s of November 2011.

And I believe that I am correct because around that same time the Treasury sold a 20 year bond with a 15 3/4 percent coupon. The 20 year part of the curve had a hump in it and the sector would generally trade 25 basis points or so cheap to the 30 year. So given that relationship my recall of the bond yield is very plausible.

The 15 3/4 percent 20 year bond was received with less than enthusiastic fanfare by investors and traded poorly in the aftermath of the auction. I do not recall if it touched 16 percent but I know it got very close.

If there are other dinosaurs in the room, please share your thoughts or comments!

IG11 (7:50AM)

The IG 11 is opening on a very wide 233/243 quote. That is about 30 wider than the previous close. Strap yourself in!

Libor Open (7:51AM)

                              10/24        10/23      Change                     
OVERNIGHT    1.28125      1.20625     .07500
1 WEEK            2.16250      2.19750    -.03500
2 WEEKS         2.48500      2.55375    -.06875
1 MONTH         3.24000      3.25875    -.01875
2 MONTH         3.37875      3.38625    -.00750
3 MONTH         3.51625      3.53500    -.01875
4 MONTH         3.52125      3.53500    -.01375
5 MONTH         3.52750      3.53125    -.00375
6 MONTH         3.52750      3.53000    -.00250
9 MONTH         3.51313      3.50500     .00813
12 MONTH       3.50875      3.50250     .00625