Bond Expert: Monday Outlook

Prices of Treasury coupon securities slumped in overseas trading as the retreat which began last week has turned into a mini rout in bond prices. Investor sentiment has shifted and risk-averse assets have lost some of their allure as investors flock to stocks and a host of other assets with more risk than government bonds.

Supply fears have also weighed on sentiment as the week will be replete with opportunities to purchase paper from the US Treasury. The Treasury will auction a 10 year TIPS bond tomorrow and 3 year notes on Wednesday with a reopening of the 10 year on the docket for Thursday.

Against that background, the yield on the 2 year note has climbed 4 basis points to a not so chunky 0.86 percent. The 3 year note has moved in lockstep with the 2 year note and its yield also climbed 4 basis points and it rests at 1.12 percent. The yield on the benchmark 5 year note has jumped 7 basis points to 1.72 percent. The yield on the benchmark 10 year notes has also climbed 7 basis points and it yields 2.44 percent. The yield on the Long Bond has climbed 6 basis points to 2.85 percent.

The 2year/10 year spread has widened to 158 basis points after being in the mid 120s last month.

I normally only cite the 2 year/5 year/30 year spread in my afternoon note. However, the move in that butterfly spread has been quite dramatic. As recently as December 22 that spread closed at 69 basis points. That spread trades this morning at 27 basis points, which means that in a very short span of time the 5 year has underperformed the wings by 42 basis points.

Equity markets have, on balance, maintained recent advances. The Nikkei rose about 2 percent and the Hang Seng gained about 3.5 percent. European equities are posting mostly modest gains. Futures market trading suggests that US indices will open with modest declines, surrendering only a small portion of last week's gains.

Economic data released overnight highlights that the global economy limped into 2009 in a fragile state and is in need of a government provided crutch.

In China the largest aluminum company slashed prices by 23 percent.

Vehicle sales in Japan tumbled to a 28 year low in 2008 as the global recession reduced demand.

A survey of European investor sentiment compiled by an entity called Sentix signaled improving sentiment in January as it rose to minus 34.4 from minus 42.3 in December.

Vehicle sales plummeted 16 percent in France in December as the recession took its toll here, too.

In the UK construction fell at the sharpest pace in a decade as a survey of building company purchasing managers touched 29.3 in December. That was the lowest level for that index since its inception in 1997.

Separately, the mighty greenback is surging against other major currencies. The Euro is currently trading at $1.3606, which is below its 20-day moving average at $1.3823 and below its 100-day moving average at $1.3617.

Analysts cite a belief in the stimulus package of the incoming Obama Administration as the reason, as some suspect that it will revive the US economy. Others remark that the recent dollar slump was technical in nature and motivated by year end markets which lacked depth.

Later this week the BOE is expected to slash rates.

The IG 11 is opening 1.5 wider at 197.5 / 200.5

For the Libor chart lovers:

Libor US$ Fixing
1/05 1/02 Change
OVERNIGHT 0.11750 0.12375 -0.00625
1 WEEK 0.29000 0.31375 -0.02375
2 WEEKS 0.33625 0.36500 -0.02875
1 MONTH 0.42875 0.43000 -0.00125
2 MONTH 1.09750 1.09875 -0.00125
3 MONTH 1.42125 1.41250 0.00875
4 MONTH 1.54750 1.54625 0.00125
5 MONTH 1.67625 1.65000 0.02625
6 MONTH 1.79375 1.75250 0.04125
9 MONTH 1.95875 1.90625 0.05250
12 MONTH 2.09250 2.02375 0.06875