Bond Expert: Monday Outlook

Prices of Treasury coupon securities are surging, and as the inverse relationship between price and yield seems to be holding, yields are surging to historic lows.

The yield on the 2 year note has declined 3 basis points to 95 basis points. That would be 0.95 percent. The yield on the 3 year note has slipped 3 basis points to 1.23 percent. The yield on the 5 year note has tumbled 6 basis points to 1.86 percent. The yield on the 10 year note has dropped 5 basis points to 2.87 percent. The yield on the 30 year bond has fallen 4 basis points to 3.39 percent.

The 2 year/10year spread has narrowed 3 basis points to 192 basis points.

Is there a solid reason for the drop in bond yields? The answer is a resounding yes.

Economic data released overnight paint a dismal picture and portray a global economy sinking deeper into recession.

In China, the Purchasing Managers Index fell to 38.8 in November from 44.6 in October. Export orders, output and new orders all contracted.

In South Korea, exports plunged the most in 7 years as they dropped 18 percent from year ago levels. That country has an agency with the Orwellian sounding name of Ministry of Knowledge and Economy, and it predicts “much further deterioration” in overseas export markets.

In Europe, the Purchasing Managers Index fell to 35.5 in November from 41.1 in October. That is the lowest reading since the inception of the Index in 1998.

German retail sales unexpectedly plunged 1.6 percent in October. Paid prognosticators did not even get the sign correct as they had anticipated a rise of 0.5 percent.

Economic data in the US which will be released a little later should follow the same patterns, with the PMI indicating a deeper contraction in manufacturing and continued slide in construction.

Early reports hold that consumers flocked to stores this weekend and spent more than expected. I do not doubt the data but cast doubt on the validity of extrapolating a robust selling season from that.

The job market is deteriorating explosively, confidence levels are at multi decade lows, the stock market has barely pared historic losses and home prices have not found a soft bottom. That is not an environment in which one can logically expect to see consumers spend with reckless abandon. It would also fly in the face of the pattern of the last several months which has brought declining consumption.

Bond yields presage the near-term direction of the economy, and as I indicated earlier, they are plummeting.

I did not note the bill market. For the record, the one month T bill trades around a single basis point and the three month bill trades around five basis points. In a healthy economy those yields would be significantly higher.

Comments

[buyitcheap:]

How much higher can prices go - you're paying $120K for a $100K face bond? Isn't that bubble behavior?

2008 Dec 01 11:00 AM

[Pipo:]

Jim Rogers says the US Long Bond is the best shorting opportunity available.

www.jimrogers-investme...

What`s your outlook on the long bond?

2008 Dec 01 01:06 PM

[buyitcheap:]

Interesting to hear that - I'm getting KILLED in my TBT position. I agree with the thesis, but man, this is painful.

2008 Dec 01 03:39 PM

[je:]

I think this upward surge is over very soon. It was predictable with all of the news that was due out.

If Bernanke and Paulson will stay in their offices for a couple of weeks and leavethe markets alone it will rally. They have to know that the market tanks everytime they speak.

2008 Dec 02 08:33 AM