Bond Expert: Thursday Outlook

Prices of Treasury coupon securities are posting small mixed changes in overnight trading.

The yield on the 2 year note has edged higher by a basis point to 0.97 percent. Likewise, the yield on the 3 year note has also climbed a basis point to 1.48 percent. Beginning with the benchmark 5 year note, yields on benchmark issues have posted one basis point declines. The 5 year note yields 2.40 percent and the 7 year note yields 3.02 percent. The 10 year yields 3.41 percent and the still investment grade Long Bond pays 4.19 percent.

The 2 year/10 year spread has flattened 2 basis points and rests at 244 basis points.

The 10 year/30 year spread is unchanged at 78 basis points.

The belly is richening versus the wings as the 2 year/5 year/30 year butterfly is 36 basis points.

There are several pieces of the economic puzzle available today.

Existing Home Sales should post a gain in August to 5.35 million units from 5.24 million in the prior month.

The pundits of the world have prognosticated and after much work are forecasting that initial claims will be unchanged at 545K.

The trading highlight of the day will be the auction of $29 billion 7 year notes. For now I will note that the 10 year note is sitting near the low yield on its recent very narrow range of 3.50 to 3.40 percent. I think that traders will want some concession and on an outright basis I see the issue a couple of basis points cheaper at 1:00 PM bidding time.

The Federal Reserve reiterated its stance yesterday that the funds rate will remain low for "an extended period" of time. How long is that and when will tightening begin?

I have always argued that the FOMC will not raise rates while the unemployment rate is rising. I subscribe to the view that the rate will keep rising well into next year and will peak in the neighborhood of 10.5 percent.

I actually watched some CNBC yesterday and listened to some Bill Gross prior to the release of the FOMC statement. I do not recall his comments verbatim but he noted that since World War 2 the Federal Reserve has not begun to raise rates after a recession until the job market manifests clear signs of improvement.

I agree with that sentiment.

Next year is a political year with mid-term elections in November. If the unemployment rate is in the middle 10s, I think that the FOMC will not risk the political wrath of politicians in both parties seeking to make political hay. Unless the economic recovery is unequivocal, I do not think that the FOMC will tangle with the ruling class on that one.