Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities are posting modest gains in overnight trading and remained poised to push through the record and historic lows attained yesterday.

The yield on the 2 year note dropped 4 basis points to 0.86 percent. The yield on the 3 year note fell 3 basis points to 1.10 percent. The yield on the 5 year note dropped 4 basis points to 1.68 percent. The yield on the 10 year note slipped 3 basis points to 2.70 percent. The Long Bond yield is unchanged at 3.21 percent.

The 2 year/10 year spread widened a basis point to 184 basis points.

Economic data released overnight was bond friendly but it was not the tsunami of data that pushed rates lower yesterday and lacked a smoking gun which would have prompted significant fresh buying.

European PPI fell more than expected in October to 6.3 percent YOY from 7.9 percent YOY in September. Paid prognosticators had expected the level to be 7.0 percent.

Against this background, some participants are trumpeting the view that the ECB has latitude to push rates lower than previously thought when it convenes on Thursday.

In the UK, a PMI for building companies plunged to 31.8 percent in November. That is the lowest reading ever for that series.

In Japan the BOJ acted to ease the credit crunch by announcing that it will accept lower rated collateral for borrowings.

There is a dearth of data today with only monthly car sales on the docket.

I expect that Treasury prices will consolidate at lower levels today unless there is an overt move from the Federal Reserve to buy longer maturities. Three weeks ago today the Treasury auctioned $20 billion 10 year notes at a yield of 3.78 percent. That is a 113-basis point move and is reminiscent of similar moves in the 1980s when rates were plummeting from all-time highs. What makes this 21st century move so unique is that the move this time began with a three handle on the 10 year. In the 1980s, the race to lower rates began from double digit levels. I think that makes the current move all the more impressive.

IG11

The IG 11 is opening about 1 basis point tighter at 258/261.

Libor

Libor US$ Fixing
12/02 12/01 Change
OVERNIGHT 1.00375 1.08750 -.08375
1 WEEK 1.19875 1.20625 -.00750
2 WEEKS 1.29000 1.30375 -.01375
1 MONTH 1.89875 1.91125 -.01250
2 MONTH 2.05875 2.06625 -.00750
3 MONTH 2.21000 2.22000 -.01000
4 MONTH 2.33875 2.36250 -.02375
5 MONTH 2.45500 2.48188 -.02688
6 MONTH 2.56875 2.60625 -.03750
9 MONTH 2.63250 2.69250 -.06000
12 MONTH 2.71250 2.77375 -.06125