Bond Expert: Monday Outlook

Prices of Treasury coupon securities have posted mixed results in overnight trading. Securities which mature in 5 years or less have registered minuscule price gains while benchmark securities which mature in seven years or more are dramatically unchanged.

Equity markets have declined in all corners of the globe and pre-market trading of US stocks points to a lower opening. Bloomberg relates stories which recount some angst regarding the banking system and some fear that the stock market may be out in front of its skis regarding the potency and power of the economic recovery.

I think that far and away the crucial story is the imposition of a tariff by the Obama Administration on imports to the US of tires manufactured in China and the subsequent reaction by the Chinese to consider taxing our exports to that country of chicken and automotive products.

The action by the US Administration on a common sense level is ludicrous. We are a debtor nation with a gargantuan need for funding. What do we do? We take an action which antagonizes a buyer who in general blindly buys our debt.

The world is on a system wherein the rest of the world manufactures widgets and relies on the US consumer to purchase said widgets. The overseas countries then pile the dollars that they have amassed into US bonds and fund our deficit and profligate spending. That is a crude and simplistic explanation of what transpires.

One can argue about the efficacy of such a system and its impact on US workers and manufacturing. That is not what I am discussing. The simple fact is that if someone provides the foreign buyers of our securities with a serious reason to question the sensibility of such a patchwork arrangement and reduces the role of those foreign entities as marginal buyers of US securities, then we will confront a serious problem.

Actually it is not a serious problem but a simple problem as US interest rates will rise and in short time asset prices will move lower. It does not take a rocket scientist or even an economist to discern that. So why the Administration would take such an action for domestic political gain is beyond me. The potential longer term deleterious impact of the move for the great mass of American people far outweighs the gain which accrues to the Administration’s union supporters.

Maybe there is a former blogger within the inner councils of the Administration with a deep and abiding knowledge of the gravity of the issue who can provide his colleagues with some clarity on this subject!

In my mind this is the main story of the day and deserves serious vigilance over the next few weeks as we observe the reaction of foreign governments and investors.

There is no economic data today.

The yield on the 2 year note has slipped two basis points to 0.89 percent. The yield on the 3 year note has also declined by 2 basis points to 1.42 percent. The yield on the 5 year note edged lower by a basis point to 2.29 percent. The yields on the 7 year note and the 10 year note and the Long Bond are unchanged at 2.94 percent, 3.35 percent and 4.18 percent, chronologically.

The 2 year/5 year/30 year spread is a little narrower at 49 basis points.

The 2 year /10 year spread is 246 basis points and the 10 year/30 year spread is 83 basis points.

Comments

[doubleguns:]

Is the tire industry unionized?

Answer that question and you might get an answer to your question!

Sep 14 09:19 AM

[Tony Petroski:]

Mr. Jansen. Scintillating as always.

Who knew bonds could be so much fun?

"...benchmark securities which mature in seven years or more are dramatically unchanged."

I love the commentary. Obama is there today (I heard), so his soothing words should patch things up, after all, he is a Citizen of the World with no reason to favor the Americans over the Chinese.

Sep 14 09:46 AM

[buyitcheap:]

Re: the tire tax - beautifully stated.

Sep 14 10:35 AM

[basehitz:]

Not the first time:
1) the economic stimulus package required purchase of domestic steel.
2) Mexican truckers were banned from driving in the US. There were 98 truckers involved vs thousand of Teamsters truckers.

Both countries are important to us, yet he angered both. Now we're trying for the hat trick with China? The pattern is clear. Most people recognize the precarious position this debtor nation has put itself in. We don't have the luxury of playing hard ball on minor issues while risking fallout on major issues. Does he think we don't realize the potential harm to the nation to protect the select groups? Unfortunately, another pattern is the biased MSM fails to report much of what is unfavorable to this administration. Still, the folks are figuring it out, and their viewership as well as Obama's poll ratings reflect that.

Sep 14 10:53 AM