Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities are posting small gains in overnight trading. As stocks declined in late New York trading yesterday, yields on benchmark Treasury debt declined several basis points from levels I had cited in my closing piece, and pandemic equity market weakness sparked additional yield declines.

The yield on the 2 year note has slipped 2 basis points to 1.19 percent. The yield on the 3 year note has edged lower by 2 basis points to 1.52 percent. (The 2 year/3 year spread is 33 basis points and it has collapsed from 55 basis points at which it traded during the underwriting process.) The yield on the 5 year note is unchanged at 2.27 percent. The yield on the benchmark 10 year note has dropped 1 basis point to 3.64 percent and the yield on the 30 year bond has declined 2 basis points to 4.17 percent.

The 2 year/10 year spread steepened 1 basis point from levels attained in late trading and rests at 245 basis points.

The 2 year/5 year /30 year butterfly is 82 basis points as the 5 year note continues to outshine the wings of that trade.

Equity markets around the globe have tumbled as the residue of the Citibank job cuts troubled investors in financial firms. More broadly, there is fear that the global recession will be deeper and more long lasting than previously thought.

Against that background, the Nikkei declined 2.3 percent. Mitsubishi UFJ fell 6.7 percent as the bank's profit plummeted 61 percent on loan losses.

Other banks tumbled in Asian trading. HSBC fell 3.6 percent and ICICI, India’s second largest bank, fell nearly 6 percent.

Chinese stocks fell 7.4 percent to their lowest levels since June and dragged down other Asian and Pacific region indices. The Hang Seng dropped 4.5 percent and the Australian market fell about 3.5 percent.

Equities in Europe have dropped, on average, about 1.5 percent.

In the UK, inflation dropped more than the pundits and prognosticators had forecast. Inflation slowed to 4.5 percent YOY from 5.2 percent in the prior month. For the month prices slipped 0.2 percent.

In the US today, investors brace for the PPI report, which should reflect the steep declines in energy prices and which analysts expect will be quite bond-friendly.

Equity markets seem set to plumb new depths and retest the lows reached intraday last Thursday. Against that background Treasury debt should remain well bid.

Stay tuned for tape bombs as the triumvirate (not literally) of Bernanke. Paulson and Bair trek to the Capitol for an inquisition on the economy and the bailout by lawmakers who always seem to me to be strutting and fretting for the TV camera. Anyway, there might be something of interest in their joint musings.

IG11

IG 11 is opening unchanged at 214/217

Libor chart

Libor US$ Fixing
                 11/18        11/17      Change         
OVERNIGHT        .40000       .40000     .00000
1 WEEK           .94375       .91875     .02500
2 WEEKS         1.13750      1.12750     .01000
1 MONTH         1.45250      1.47375    -.02125
2 MONTH         2.09000      2.11375    -.02375
3 MONTH         2.21750      2.23875    -.02125
4 MONTH         2.36000      2.39500    -.03500
5 MONTH         2.49125      2.54000    -.04875
6 MONTH         2.63125      2.71375    -.08250
9 MONTH         2.70250      2.79750    -.09500
12 MONTH        2.79500      2.88000    -.08500