Bond Expert: Monday Outlook

Prices of Treasury coupon securities have registered mixed results in overseas trading. The yield on the 2 year note has declined by 2 basis points to 2.10 percent while the yield on the 5 year note is unchanged at 2.90 percent. Issues with maturities of 10 years or longer posted small losses. The yield on the 10 year note climbed 2 basis points to 3.72 percent and the yield on the 30 year bond moved 2 basis points higher to 4.51 percent. The 2 year/10 year spread is 162 basis points.

Equity markets around the globe have posted mixed results. Asian markets and the Australian market have posted solid gains on hopes that credit problems are receding and optimism that exporters will thrive. Against that background, the markets jumped between 1.60 percent and 3.1 percent. European markets are generally lower by about one percent. Supposedly ,concerns about the effect of the higher price of oil have generated the European stock market losses. Futures markets indicate that the US market will open with modest losses after the outsized gains of last week.

The problems in the credit markets should concern the bond markets and equity markets as the credit crunch has not slipped away into obscurity . It remains very high profile and on the front burner.

In that regard, the Bank of England announced a facility to ease the bank to bank lending problems in the UK as it agreed to a plan similar to one hatched by the Federal Reserve. The BOE will lend government bonds to dealers and receive in exchange mortgage securities. This is real long term stuff as the Bloomberg story reports that the term of the action is one year and will be renewable for 3 years. They are providing $100 billion of this facility. That is not the action of a central bank blithely observing a problem but a reaction of an organization with deep concerns.

Against that background, UK home prices dropped in April and the Bloomberg story employed a nice verb noting that the dysfunctional credit markets had “starved” the markets of mortgage credit.

Bank of America reported its Q1 results and they were not pretty as earnings dropped 77 percent on writedowns and credit losses.

There is no meaningful economic data today.