Bond Expert: Thursday Outlook

Prices of Treasury coupon securities have registered modest gains in overnight trading as the economic backdrop for investors remains grim. The yield on the 2 year note has declined 2 basis points to 1.14 percent and rests within spitting distance of the record low yield attained in 2003. The yield on the 3 year note has slipped 3 basis points to 1.56 percent. The yield on the 5 year note has dropped 3 basis points to 2.32 percent.

The yield on the 10 year note is 3.70. That is the new 10 year note. When we adjust for the forward roll the yield on that security the yield has declined 2 basis points. The yield on the 30 year bond has edged lower by one basis point to 4.16 percent. The 2 year/10 year spread is 256 basis points. That spread has widened because the forward roll into the new issue is about 8 basis points.

The Treasury will complete the final leg of the quarterly refunding today with the sale of $10 billion 30 year bonds. The issue has cheapened against other benchmark issues as the yield curve steepens and I suspect that the auction will have a felicitous ending at 100PM.

It helps that the first two legs of the refunding went well as each of those issues is trading at a profit. So, in a sense, the dealer community has the wind at its back on this one because the first two auctions have generated trading profits. That should serve to foster risk taking appetites as the bidding deadline approaches.

There is finally some economic data to digest after several days devoid of information flow. Traders will brace for the trade balance report as well as the weekly claims data. I doubt that the trade balance will be particularly interesting but at the margins it sometimes motivates economists to recalculate their GDP forecasts.

The initial claims data has always been one of my favorite pieces of economic data as it is practically real time data. There is virtually no lag and we can capture the mind set of business very quickly as we track the number of employees heading for the unemployment line. The consensus forecast calls for a slight increase to 482K

As an amateur economist I wonder if this is not the week in which claims take an unexpected jump and move closer to the 500k level. It seems that nearly every bit of data has been worse than expected and the earnings warnings from major companies tells me that business were in a mood to fire rather than hire.

Wal-mart (WMT) reported earnings this morning and reduced its profit estimate for the year.

In Europe the German economy contracted 0.5 percent in Q3 after slipping 0.4 percent in Q2. Bloomberg reports that is the worst back to back result in 12 years.

IG11

IG 11 is showing modest improvement at the open as it has narrowed 5 basis point to 196.

One trader reports that the Index has traversed the 180/200 level three times in the past month and he expects some tightening as participants trade that range.

Libor

Libor US$ Fixing
                 11/13        11/12      Change         
OVERNIGHT        .40000       .38250     .01750
1 WEEK           .87500       .84000     .03500
2 WEEKS         1.06250      1.04000     .02250
1 MONTH         1.42250      1.40875     .01375
2 MONTH         2.04125      2.01625     .02500
3 MONTH         2.14875      2.13250     .01625
4 MONTH         2.30750      2.27375     .03375
5 MONTH         2.44000      2.39125     .04875
6 MONTH         2.59500      2.52500     .07000
9 MONTH         2.67000      2.60750     .06250
12 MONTH        2.75125      2.68250     .06875

The gentleman who is kind enough to send me this each day failed to place a plus sign or minus sign next to the change for the day.  All of the rates are marginally higher than the previous day.

Comments

[whidbey:]

Thanks for the table, it is helpful.

I will be glad when the funding is over to see what the market shapes out to be.

2008 Nov 13 11:47 AM

[kurt walter:]

A lot of big name companies have corporate bonds selling for 40 to 70 cents on the dollar with yields from 12% to 25%. They have been hammered.

2008 Nov 14 02:33 PM