Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities are virtually unchanged in overnight trading. President Obama addressed the nation last evening in a speech long on rhetoric and short on specifics. What he outlined in terms of proposals will certainly cost a chunk of money but he was not precise about the cost. The net result for the financial markets is that he did not move them, and as I noted, bond prices are virtually unchanged.

The yield on the new 2 year note slipped a basis point to 1 percent. The yield on the 3 year note is unchanged at 1.35 percent. The yield on the 5 year note is unchanged at 1.87 percent. The yield on the 10 year note has increased a basis point to 2.80 percent and the yield on the Bond increased a basis point to 3.50 percent.

The only economic data in the US today is the report on existing home sales at 10:00AM. It is unlikely that report will be market moving.

Bond market participants will focus today on the second leg of the $94 billion worth of coupon issuance this week as the Treasury sells $32 billion 5 year notes. The issue took a significant drubbing on the curve yesterday as it lagged the 2 year note and the 30 year bond by about 11 basis points. This is the largest 5 year note issue since the invention of the abacus so I expect that the auction process will produce an additional concession. It is difficult to foam at the mouth over these bonds when tomorrow at the same time there will be $22 billion 7 year notes to bid.

Overnight economic news was on the bland side, too.

Wages in Australia showed unexpected gains in Q4 (1.2 percent growth) and that strength has some calling for the central bank to slow down in its rate cutting exercise.

Here is an interesting one and I am not sure what it says if anything about Australia. Bloomberg reports that the largest maker of underwear (Down Under and no pun intended) is slashing its work force by 23 percent.

In Hong Kong the GDP contracted at its fastest pace since 1999 as economic activity declined 2.5 percent.

This one is really telling regarding the contraction in global trade: Japanese exports in January had plunged 45.7 percent from a year ago.

Advantest (ATE) is the world’s biggest maker of memory chip testers. It will shortly reduce its workforce by 26 percent.

German exports slumped 7.3 percent in Q4 from Q3. GDP contracted at 2.1 percent in Q4.

Finally, as German government financing needs to rise to combat the recession and financial crisis, the government will raise the funds in the short term market and will eschew raising long maturity funds. The government cites the tremendous demand for short term assets generated by the flight to quality.

A friend of the blog e-mailed a note that CDS spreads on German debt had reached record wides.

Comments

[Larry Livin...:]

Hi John,

Great stuff every day, thank you!
How do you explain the 30 year swap still being so negative? I thought that the move in Yen was a driver behind the move lower in spreads but obviously this has not proved out...
Do you think that the change in how insurance companies discount their obligations based on the swap and not the treasury rate has something to do with this?

Thx much!

Feb 25 11:13 AM