Bond Expert: Thursday Outlook

Prices of Treasury coupon securities have sagged in overnight trading and the belly of the curve has weakened versus the wings of the curve.

The yield on the 2 year increased a basis point to 0.96 percent. The yield on the 3 year note edged higher by 2 basis points to 1.50 percent. Likewise, the yield on the 5 year note increased 2 basis points to 2.36 percent. The yield on the 7 year increased 3 basis points to 3.01 percent. The yield on the 10 year note edged higher by 3 basis points, also, to 3.41 percent. The yield on the 30 year bond increased a humble basis point to 4.22 percent.

The 10 year/30 year spread has narrowed 2 basis points to 81 basis points.

The 2 year/10 year spread widened 2 basis points to 245 basis points.

The 2 year/5 year/30 year spread has narrowed to 46 basis points. Supply should have a deleterious effect on that spread and it should continue to narrow into the 30s.

The Treasury will announce a huge block of supply today. This will be the largest tranche of bond supply offered in a four day period since the days when humankind learned to stand erect. Analysts anticipate that Mr. Geithner and his minions will offer $7 billion 5 year TIPS, $44 billion 2 year notes, $41 billion 5 year notes and $30 billion 7 year notes.

In Q4 of last year issuance of 2 year notes averaged $36 billion per month. If the Treasury holds at $44 billion (which is a dubious proposition) that is an increase of about 22 percent (and I thank Sister Mary Consolata for the ability to calculate that quickly in my head). The first seven year note of this new rapacious issuance cycle was a $22 billion offering in February. If it comes to pass that Treasury does sell the estimated $30 billion, that would represent an increase of 36 percent in just eight months.

With deficit projections north of a trillion dollars stretching out as far as the eye can see, it is hard to grapple with the amount of issuance that the Treasury will need as we march forward.

In that regard it is great to hear from a Moody’s analyst that the pristine US credit rating is safe for now at AAA. These are the folks who paced their imprimatur on very large batches of subprime debt which eventually went bust.

I wonder about the fiscal future and our ability as a nation to face the stark reality that we are blithely living beyond our means and that some sort of fiscal crunch is on nigh.

I think that politicians are operating in some sort of twilight zone or some alternate universe as they debate proposals which will only exacerbate our problems.

George Bush marched us into two wars and (for him) eloquently spoke of the dangers which a very small band of extremists and kooks posed for civilization. He called the moment our generation's World War 2. I think that is accurate.

But if one buys that proposition it is inconceivable to me that he chose to fight those wars without asking for sacrifice.

I do not understand our very glib current President or his Congressional allies. I am not about to suggest that health care for everyone is anything less than noble and magnanimous but the cost is enormous.

As a society we are out of control and need discipline. At some point when we least expect it the market will sneak up and impose that discipline.

I ramble once again and apologize.

Comments

[phil from E...:]

Don't apologize.

Oct 22 09:51 AM

[James Levy:]

Another serious, INDEPENDENT observer of the current financial (and moral) situation of our nation who is profoundly worried. I share your concern. It is not the military-industrial complex which threatens our nation, it is the government/Goldman complex! Fascism is a system where corporate and government interests dominate over all other aspects of society.

The chickens will come home to roost eventually in the US. Maybe it was´nt such a good idea after all to put a man with NO experience in ANYTHING in the White House
. Hillary, sooo sorry!. God Save the Republic!

Oct 22 10:13 AM

[guayas12:]

Though we have never met I enjoy starting and ending my day with your musings. Your description of the Curve´s ever changing structural anatomy is secondary, for me, to your perspective from thirty-year lenses.
I, too, am very worried, and getting more so. The element of trust, so important in the investment community of yesteryear (especially the boring bond market), is being replaced by increased volatility (spelled distrust).
Does the USA have the stomach to live lives with so much stress, facing the precipice daily? More and more Americans do so and unemployment lines continue to lengthen, just imagine what this Christmas is going to be like for millions of our fellow citizens.
I don´t know what the answer is though I concur with you that the market will impose its discipline at some point. For the growing numbers of unemployed it already has but I fear the market´s severity has not yet been tested.
Sister Mary taught you well, Mr Jensen, keep up the good work.

Oct 22 10:15 AM

[Tony Petroski:]

Mr. Jansen:

"This will be the largest tranche of bond supply offered in a four day period since the days when humankind learned to stand erect."

This is the kind of bond talk that I can't get enough of although at times I struggle to stand erect.

Hang in there Mr. Jansen. We live in interesting times. Some of the pillars will still stand.

Oct 22 10:19 AM

[mb2:]

Don't let up on 'em Mr. Jansen... By the way; would you please give us "small" guys some advice on how to prudently time a short position.

Oct 22 10:47 AM

[lotogo:]

...These are extrordinarily interesting times, and your commentaries are a match for them as well as a joy to read, Mr. Jansen. Hang in.

Oct 22 01:07 PM