Bond Expert: Monday Outlook

Prices of Treasury coupon securities are mostly modestly lower in overnight trading as the Citibank (C) bailout ignited equity market advances which make fixed income assets less desirable. Supply is also a factor as the United States Treasury will come to market today for $36 billion 2 year notes and once again tomorrow for $26 billion 5 year notes.

The yield on the 2 year note has climbed 6 basis points to 1.16 percent. The yield on the 3 year note has climbed 7 basis points to 1.43 percent. The yield on the 5 year note has edged higher by 5 basis points to 2.08 percent. The yield on the 10 year note has increased 2 basis points to 3.22 percent. The one winner is the Long Bond which has seen its yield slip one basis point to 3.68 percent.

The 2 year/10 year spread is 206 basis points.

The Citibank story is certainly the top story of the day. I know the news broke in the middle of the night but it seems to me that after 15 months of this, and after Bear, and Freddie and FNMA and AIG and Lehman, that the markets are inured and somewhat desensitized to news which prior to August 2007 would have been viewed as momentous.

Effectively the taxpayers are propping up an outfit with $2 trillion in assets and equity markets are screaming. I guess I think that there should be a deeper concern at our plight and the realization that the problems which infect our system could run so deep.

It is also ironic that Citibank is too big to fail and requires rescue. The regulators encouraged them as the firm spread its tentacles across the financial landscape. The new Administration should make its first order of business a review of the risk still inherent in the system. JPMorgan (JPM) is an aggregation of JPMorgan, Chase, Manny Hanny, Chemical Bank, Texas Commerce Bank, National Bank of Detroit Bank One and First Chicago. That makes no sense and if the new administration wishes to establish “change” then they should begin by splitting up these supersized entities and establishing them as new firms which are not too large to fail.

The IFO index in Germany fell more than expected to 85.8 from 90.2 and reached a 16 year low.

Comments

[SW Richmond:]

JPM owns the regulators, and will be allowed to do whatever it wants. "Too big to fail" is policy, it is how banks retain their hold on government. No regulatory body has the power to break up JPM.

Where are the bond vigilantees? Bloomberg today says that Fed and Treasury spending and guarantees run over $7 Trillion. Schumer wants another stimulus on Obama's desk 21 Jan, half a trillion or more. We've only just begun this process, we are far from the end. How can an entire planet suspend disbelief? I know the public schools are bad, but sheesh.

2008 Nov 24 09:25 AM