Bond Expert Tuesday Outlook: Meeting the Treasury

Prices of Treasury coupon securities are posting robust gains in overnight trading. Risk aversion has risen from the dead as the dollar is rallying to 4 week highs and global equity markets are quaking. Futures market trading indicates that US markets, too, will open with sharp declines.

Feeding the paranoia were large and continuing losses at UBS and news that the UK government has invested heavily in Royal Bank Scotland and Lloyds. Those transactions provide that a significant number of employees at that firm may not receive cash bonuses.

The yield on the 2 year note has declined 3 basis points to 0.88 percent. The yield on the 3 year note has edged lower by 4 basis points to 1.39 percent. The yield on the 5 year note has declined 4 basis points to 2.29 percent. The yield on the 7 year note slipped 5 basis points to 2.95 percent. The yield on the 10 year note has dropped 4 basis points to 3.38 percent. The yield on the Long Bond has declined 3 basis points to 4.23 percent.

The 2 year/10 year spread has narrowed a basis point to 250 basis points.

The 10 year/30 year spread, conversely, has steepened a basis point to 85 basis points.

The 2 year/5 year/30 year butterfly has improved to 56 basis points as the 5 year flattened a basis point versus the 2 year note and outperformed the Long Bond by a basis point.

There is quite a bit of news to digest over the remainder of this week.

The Federal Reserve begins its two day consistory today and will discuss the near term course of interest rates. Since the last meeting and the OpEd piece by Fed Governor Warsh there has been significant discussion of the ‘exit strategy” topic by Fed officials and in the financial press.

I do not believe that the FOMC will significantly tweak the statement and leave an impression that a tightening of monetary policy is imminent.

As I mentioned in a post last evening I spent several hours yesterday at the US Treasury with other members of the economic blogosphere and with senior Treasury officials. It is my impression that those officials harbor deep misgivings regarding the vitality of the nascent recovery and are fearful that there will be too little demand for too long.

Against that background and with the personal belief that the Treasury and Federal Reserve are working in tandem to revive the economy, I hold it unlikely that the FOMC would take any steps which would undermine a very fragile recovery.

Regarding the meeting it was very interesting and involved a vigorous discussion of current issues. The significant portion of the discussions focused on the twin topics of regulatory issues and reform of the financial system.

Unfortunately for me, very little time in the session was spent on my strong suit of the markets so I do not have very much to pass along. I will await comments from other attendees who were more active participants in the discussions on regulation and reform.

I do find it interesting that the Administration would reach out to bloggers. It does suggest to me that those in power are less than enamored with traditional press outlets and prefer the highly focused audience which bloggers command.

I do not wish to be fawning or obsequious but I would also comment (as a citizen) that even if one disagrees with the policy prescriptions offered by the Administration, you are left with the belief that this is a group of high caliber and dedicated public servants working strenuously to rectify problems which took years to develop.

Comments

[Tony Petroski:]

I'm happy to see the Bond Expert back on the job. I thought perhaps it was Victoria Day in Australia yesterday and therefore a day off. Instead, it was a great chance to rub elbows with those who are up to their elbows.

Mr. Jansen advises:

"I do not wish to be fawning or obsequious but I would also comment (as a citizen) that even if one disagrees with the policy prescriptions offered by the Administration, you are left with the belief that this is a group of high caliber and dedicated public servants working strenuously to rectify problems which took years to develop."

That's good enough for me. It gives me hope.

Nov 03 08:15 AM

[User 308605:]

ditto tony petroski!!!!!

Nov 03 10:06 AM

[JasonC:]

The threat in the near term remains deflation and there is no reason for the Fed to tighten yet. The economy could not take it, it would be a 1938 style mistake and Bernanke is not going to make that one, he knows the history too well.

Longer term the trade on the board is to go short the 2 to 10 year spread. It won't stay this wide forever. Likely the short end moves upward as the economy recovers, along with an overall upward shift of the curve. Possibly the long end breaks downward on significant additional weakness, though I would put the chances of the first at 3-4 times those of the second. But here is what won't happen - 2s staying under 1% while 10s go to 5%...

Nov 03 04:31 PM