Bond Expert: Friday Wrap

Prices of Treasury coupon securities traversed a rocky road today and are finishing the day with mixed results. Across the curve benchmark issues registered their best levels as I was writing my opening piece at 600AM. At that time the stock markets were down limit and it appeared that those who loved napalm in the morning would have an enjoyable experience.But the end of the world is once more a dream deferred, and while the stock market is down around 3 percent as I begin this (300PM) the debacle has been quite orderly and each wave down in equities has seemed to attract some buyers.

The 2 year note is trading at 1.50 percent and is better by 10 basis points for the day. The yield on the 5 year note has tumbled 8 basis points to 2.55 percent. The yield on the 10 year note has declined 1 basis point to 3.66percent (it had traded as low as 3.53 percent this morning). The yield in the Long Bond is unchanged at 4.05 percent. As I noted in a previous posting the yield on the bond reached a modern era low earlier today at 3.88 percent.

The 2year/10 year spread has widened 9 basis points to 216 basis points.

Traders and salespersons report light flows in the Treasury market. Several participants reported that clients who did trade were only doing what they were compelled to do. Most activity seemed directed toward reducing risk and balance sheet.

Late in the day the Wall Street Journal ran a story which reported that the treasury was considering taking equity stakes in some of the large insurance companies via the TARP. The WSJ story noted that such action would quickly deplete the TARP funding.

The next two weeks have the potential to be watershed events for the markets. There is a veritable tsunami of data and events which will shape views and mold opinions.

Three events dominate the landscape. The FOMC meets this coming week, and the market has priced in a 50 basis point ease. I am confident that they will do that and I am also strong in the belief that the statement at the conclusion of the meeting will encourage the belief that another rate cut is not far behind. The Committee will acknowledge the debilitated condition of the domestic economy and the similarly dire state of the global economy.

During this period the Treasury will announce the refunding package for November. They should return the 3 year note to the flock and, given their absolutely gargantuan appetite, they will give the market some guideposts regarding the methods they will employ to raise those funds.

Finally, the results of the election could signal the end of an era of laissez faire capitalism and usher in an era of unaccustomed regulation and government control. It certainly seems as though Senator Obama is on track to be the next President. If the Democrats can sweep the Senate they will have a clear field to change the nature of the debate as Ronald Reagan did in 1980. We will know on the morning after.

There is also a plethora of economic data on the immediate horizon. Among the reports which print next week are Consumer Confidence and Durable Goods . We will get our first glimpse of Q3 GDP and the quarterly employment cost index. The Chicago Purchasing Managers Index is on the docket as well as Personal Income and Spending data.

In the following week there is the labor data for October as well as the ISM.

When all of that data has been digested and absorbed, I think participants in the major markets will have a better idea on the near term course of the economy and interest rates.

Comments

[surgcare:]

If you think "sharing the wealth" will restore the economy and massive restrictions and higher taxes , YOU'RE NUTS .

2008 Oct 25 02:48 PM

[montyv:]

Is there any way to short a treasury note ans effectively borrow money at .5-1.5% for 3Mo - 1 Yr? Also need to do something with that money, I assume that would need to stay int he Inv. Account. Would that be at the same margin as buying bonds? such as 10-20%?

Thanks if anyione can give any advice.

Would selling a treasury option future be the same thing?

2008 Oct 26 03:51 AM