Bond Expert: Monday Outlook

Prices of Treasury coupon securities are posting small mixed changes on overseas trading. The yield on the 2 year note has slipped 3 basis points to 0.95 percent. The yield on the 3 year note is unchanged at 1.48 percent. The yield on the 5 year note has declined 1 basis point to 2.41 percent. The yield on the 10 year note is unchanged at 3.50 percent and the yield on the Long Bond has climbed a basis point to 4.33 percent.

The 2 year/10 year spread is 3 basis points wider at 255 basis points.

The 2 year/5 year/30 year butterfly is 46 basis points.

Equity markets around the globe are weak as the shock of the labor data from Thursday percolates and reverberates through global financial markets. Early indications are that there will be no bounce in the US as markets here will open with about one percent losses.

The focus of the day and week will be supply from the US Treasury. The auctions begin today with the sale by the Treasury of $8 billion 10 year TIPS.

As I write, the breakeven inflation rate is 1.64 percent. That has cheapened dramatically over the last month as it had traded as wide as 205 basis points in June when the market was at its low. The whiff of wage stagnation/deflation in the jobs report will certainly not add to demand for TIPS.

There is one noteworthy piece of economic data today and that is the non manufacturing ISM. The consensus expects an increase to 46 from 44 in May. For some perspective, it averaged 40.7 in Q4 and 41.8 in Q1.

Comments

[buyitcheap:]

Isn't there some history with prolific issuance of inflation linked bonds that ended with wheelbarrows of cash (German marks, I believe) being needed to buy bread in the 1930s? Could the excessive issuance of TIPs be in itself, inflationary?

Jul 06 09:17 AM

[whidbey:]

The big news today is way the treasury offerings are received by the market. I suspect that deflation is still making bonds attractive. We will know more as this earnings season is unveiled. The dollar supportive comments from G8 members are helpful, but maybe transitory. All in all, its summer and the living is easy so long as spending does not have to equal revenues. Structural hell looms.

What do you think of the July 13th Forbes "The Case for Bonds" ? I am not there yet, what about you?

Jul 06 10:42 AM

[upgrayed:]

What is the size of the TIPs market compared to the money supply and how does that compare to other types of bonds. I would need more evidence like that to buy into your thesis.


On Jul 06 09:17 AM buyitcheap wrote:

> Isn't there some history with prolific issuance of inflation linked
> bonds that ended with wheelbarrows of cash (German marks, I believe)
> being needed to buy bread in the 1930s? Could the excessive issuance
> of TIPs be in itself, inflationary?

Jul 06 01:03 PM