Bond Expert Monday Outlook: Positioning for the Week Ahead

Prices of Treasury coupon securities have, on balance, posted gains in overnight trading. The belly of the curve which has performed so poorly of late has registered the most significant gains.

Economic data released overnight was positive. Japanese business confidence increased sharply to 13 from -66 three months ago.

German business confidence rose for the third straight month to 85.9 from 84.3 The index had touched a 26 year low of 82 in March.

The World Bank has struck a pessimistic note as it has opined that the recession will cause the global economy to contract at a 2.0 percent rate in the current year. The Bank had previously forecast a 1.7 percent decline. Equity markets in Europe have declined about 1.5 percent and premarket trading indicates that US equities will be down about one percent at the open.

There are no major economic releases in the US today.

The yield on the 2 year note is unchanged at 1.20 percent. The yield on the 3 year note declined 3 basis points to 1.80 percent. The yield on the 5 year note has declined 5 basis points to 2.75 percent. The yield on the 7 year note slipped 3 basis points to 3.40 percent. The yield on the 10 year note has slid 3 basis points to 3.75 percent and the yield on the Long Bond has dropped a basis point to 4.49 percent.

Today should be about positioning for the remainder of the week. The week will be dominated by Treasury issuance and then by the FOMC meeting.

The issuance spigot is open and the Treasury will offer $40 billion 2 year notes tomorrow. I suspect that the supply is the reason that the 2 year note yield has remained unchanged overnight while the yields on other bonds have dropped.

With the bidding process happening in advance of the result of the FOMC meeting. market participants will strive to shoot the taxpayers in the big toe on Tuesday and Wednesday. I think that each of those auctions will provide a steep curve concession.

What will the Federal Reserve announce at the conclusion of its meeting on Wednesday?

They will certainly acknowledge the improvement which has occurred since they last spoke. The labor market is weak but certainly less so than when they last spoke in March as the declines in payrolls has slowed and initial claims are on a restrained but downward trajectory.

Indicators on manufacturing and various confidence surveys are manifesting some turnaround.

Inflation appears contained with core CPI still running at a 1.8 percent YOY pace (same level as previous meeting). Average hourly earnings are increasing at a 3.1 percent pace which is down from a yearly pace of 3.4 percent in March.

The biggest challenge facing the domestic economy is the slack in the economy as measured by Capacity Utilization and the unemployment rate. Capacity utilization is at 60 year lows and the unemployment rate is approaching 30 year highs.

I think that the FOMC will genuflect to the recovery which is in its formative stages and acknowledge the improvement of the last several months.

I think they will also point out that they are concerned about the recovery and the fragile global economy and that to sustain the recovery they intend to keep the funds rate low for an extended period of time.

With the unemployment rate fast approaching 10 percent, it is inconceivable that they should raise rates. Economists at UBS suggest that the potential growth rate for the US economy is 2.5 percent. They believe that in order to bring the rate down by one percent the economy must grow 2 percent above potential. That is a tough order in this environment.

Comments

[whidbey:]

"I think they will also point out that they are concerned about the recovery and the fragile global economy and that to sustain the recovery they intend to keep the funds rate low for an extended period of time." Probably.

This is termed the beggaring of the retired, the retirement funds, insurance companies, small banks, not to mention the saving class in the work force. A wealth transfer in aid of the impossible dream.

Jun 22 10:29 AM

[SW Richmond:]

Lots of issue this week. Money out of stocks and into Treasuries. Ho-Hum. Just about the time a bunch of us realize this trend is tradeable, they will change it.

Pass the popcorn.

Jun 22 11:18 AM

[David White:]

John Jansen: The World Bank prediction out this morning calls for a world economy shrinkage of 2.9% this year, not 2.0%. They also called for the developed nations to do much better than the others. This no doubt has a lot to do with the bond performance today. There seems to be a "flight to quality" going on. I tend to believe the huge Treasury auctions throughout this week will tend to override that. Still nothing is sure in today's market, especially with the Fed announcement coming on Wednesday.

You also have to consider that the ECB has been dropping hints that they may lower their lending rate from 1% in the near future. This would tend to push the US Dollar up (probably US bonds too).

Jun 22 11:58 AM

[Bull Run:]

The Feds purchased $7.5 billion of the $20.7 billion issued on Monday, with mat. between '16 and'19, or about 1/3 of all issuance. I guess that makes sense for some. Print money and buy your own debt. Print more debt becuase you need more money. Maybe I'm just too old to understand all this. I remember Buffett's comment yrs. ago at the peak of the Dot com frenzy. When Wall Street turned the Nasdaq into a Venture exchange and venture companes on the verge of going broke, with NO products and No profits, had market caps larger than Dow components. He said if you cannot understand it or make sense of it, don't buy it..

Jun 22 12:24 PM