Bond Expert Monday Outlook

Includes: BIV, IEI, TLO
by: John Jansen

Prices of Treasury coupon securities are posting modest losses in overseas trading.

The once mighty greenback is faltering versus the Euro as that currency has gained about a penny. Gold has raced to a record high and oil is posting solid gains.

European equity markets have posted robust gains and premarket trading suggests that the euphoria will continue stateside when trading begins here.

There were some interesting stories overnight. I linked to one in which Saint Louis Federal Reserve President Bullard said that the Fed should maintain its QE policy via MBS purchases past the current March 31 2010 deadline.

At the same time Reuters reports that the National Association of Business economists has upped its forecasts of economic growth for 2010. That august group raised the growth forecast but notes that unemployment will remain stubbornly high.

I think that the dominant factor this week will be the huge offering of 2 year notes, 5 year notes and 7 year notes by my personal friends at the US Treasury. The first auction will be the 2 year note today. The Treasury has slightly more than an odd lot for sale with $ 44 billion available for bidding .

The is plenty of money sloshing around the front end of the bond market as evidenced by the negative rates on bills which caused some to hyperventilate last week. Some of that money will find a home in the 2 year note and with the dollar continuing to need propping it is a good bet that foreign central bank money should be available in size.

The one main flaw in this issue is that the WI bond yields inside of 80 basis points and is down sharply from the 1.02 percent level which prevailed last month. So this will be a strong test of the level of excess liquidity lubricating the financial markets.

I nearly forgot to mention the compressed trading week. The bond market is closed on Thursday for Thanksgiving and Friday is practically a holiday. Wednesday many participants will head for home and hearth early as they prepare for the holiday. That backdrop means that if you buy any of these little gemlets there will be very little opportunity to trade out of them by the time one exits the building on Wednesday.

I think that factor will influence demand but much more so in the 5 year offering and in the 7 year offering. Look for those issues to cheapen versus surrounding issues and the curve. The bottom line is that the profligate spending by the taxpayers will lead to cautious bidding and sloppy auctions this week.

The yield on the 2 year note has climbed a basis point to 0.73 percent. The yield on the 3 year note has also edged higher by a basis point to 1.26 percent. The yield on the 5 year noted increased a basis point to 2.19 percent. The yield on the 7 year note increased by a single basis point to 2.91 percent. The 10 year note is the relative value loser as its yield climbed 2 basis points to 3.38 percent. The yield on the Long Bond climbed a basis point to 4.30 percent.

The 10 year/30 spread narrowed a basis point to 92 basis points.

The 2 year/10 year spread is 265 basis points.

The 2 year/5 year/30 year spread is 65 basis points.