Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities are mysteriously posting modest price decline in overnight trading. Mysteriously? I am talking my book as I remain long the LQD and purchased some IEF last week during the auction process. But the price action is atypical as risk aversion is on the rise once again.

Equity markets around the globe have posted sharp declines and futures market trading indicated that the US market will open with a fairly robust loss. Overnight the Nikkei dropped nearly 5 percent and the Hang Seng dropped 2 percent. In Europe major exchanges have slumped between one percent and 2 percent.

The dollar is gaining ground against most other currencies except the yen. Yen strength has been a barometer of risk appetites and at the moment appetite for risk is fading as the yen improves.

The yield on the benchmark 2 year note has climbed 2 basis points to 0.73 percent. The yield on the benchmark 3 year note has also climbed 2 basis points to 1.09 percent. The yield on the benchmark 5 year note has increased a basis point to 1.45 percent. The yield on the 10 year note is unchanged at 2.31 percent and the yield on the Long Bond sits at a seemingly lofty 3.00 percent.

Global economic weakness is ubiquitous. As I was perusing the overnight news I mistakenly ended up on a page with some news about South Africa. Business confidence in that country slumped to a 5 ½ year low in December.

S & P noted that the FX rating of New Zealand was in potential jeopardy.

Exports from China declined 2.8 percent YOY in December. The drop in exports was the biggest since 1999. Shipments to Europe dropped more than 3 percent and shipments to the US fell more than 4 percent.

One way to repair current account balance surpluses is via global economic contraction. The Japanese current account surplus contracted for the ninth consecutive month and shrank nearly 66 percent YOY.

In the UK a survey of the housing market by the Royal Institute of Chartered Surveyors showed that home sales fell to the lowest level in three decades. However, there was a glimmer of hope as there was some indication on the report that house prices might be finding a bottom.

Finally, the German government has agreed on a stimulus package worth (today) $66 billion.

The IG 11 is opening four basis points wider at 219/222.