Bond Expert: Monday Outlook

Prices of Treasury coupon securities are posting modest gains in overnight trading. The yield on the benchmark 2-year note has tumbled 5 basis points to 1.69 percent. The yield on the 5-year note has slipped 3 basis points to 2.54 percent. As one moves out to the longer maturities the yield declines become a bit more begrudging as we observe a 2 basis point decline in the yield on the 10-year note to 3.45 percent. The yield on the 30-year bond has fallen by 1 basis point to 4.29 percent. The 2-year/10-year spread has widened by 3 basis points and is 176 basis points this morning.

Equity markets in Asia and Australia mimicked the results of the US markets on Friday as Australian stocks dropped about 1.8 percent and stocks in Tokyo and Hong Kong shed 3.05 percent and 3.47 percent, respectively. European shares are declining but by lesser amounts as most exchanges on that continent are down between ½ percent and 1.0 percent. Futures market activity at the moment indicates the US stocks should open trading with modest losses.

This will be a watershed week for the financial markets as waves of economic data will mold investor sentiment regarding economic prospects. That data, if it prints as expected, should solidify the belief that the worlds largest economy is in recession.

Retail sales data scheduled for release this morning are expected to rebound from the very weak levels which prevailed in February but weakness in the job market and despondent confidence readings make it likely that adjusted for inflation consumption was flat or declining.

Later in the week various manufacturing indices should will manifest contraction but at a slower rate than observed in prior reports. The Empire survey, the Industrial Production report and the Philadelphia Federal Reserve survey of manufacturing are all expected to show a manufacturing sector on the decline but at a slower pace of decline than the previous month.

Housing has led the economy into the abyss but data on Starts,existing home sales and the homebuilders survey are expected to show that sector in deep contraction with no signs of immediate relief on the horizon.

Also slated for release this week are PPI, CPI and the weekly claims data.

The trading pattern in equities will also dominate trading in fixed income markets this week. The week begins with a major mea culpa from Wachovia Bank (WB). The giant bank reported a quarterly loss, slashed its dividend and is reportedly negotiating a chunky dilution of the stake of current shareholders. The Reuters story on this had a great quote as the Wachovia press release classified the $2 billion write down as “market disruption valuation losses”. Somewhere George Orwell is smiling at that awkward construct!

Later in the week Merrill Lynch (MER) and Citibank (C) will report earnings and in each instance they should be less than festive. The severity of earnings disruptions for each of those financial giants will set the tone for fixed income market trading.

Last week the 10-year Treasury could not breach the 3.45 percent level. I would focus on that level and if the issue can sustain trading below that level it will likely make a run toward the previous cycle low in yields at about the 3.30 percent level. The “modern” low was back in 2003 at about 3.10 percent.

Have a great day.