Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities have registered modest losses in overnight trading. The yield on the benchmark 2 year note has increased by 3 basis points to 2.20 percent. The yield on the 5 year note has climbed 4 basis points and rests at 2.97 percent. (The Treasury is auctioning 2 year notes and 5 year notes later in the week and in when issued trading the forward rolls are positive such that one can garner a 2.25 percent yield on the new 2 year and 3.00 percent on the freshly minted 5 year. I guess in actuality the ink is not dry on either of those securities at present.) The yield on the benchmark 10 year note has risen 2 basis points to another of those mythical mileposts as it yields 3.75 percent. And the Long Bond yields 4.51 percent as its yield has risen by 2 basis points. The 2 year /10 year spread,the serpentine meanderings of which I faithfully chronicle here daily, is 155 basis points.

Global equity markets are mixed with most registering marginal losses but with some others showing small gains.

A quick perusal of the TOP page on Bloomberg would have one thinking that he or she is having a flashback and it is August 2007. Battered bank Royal Bank Scotland is raising $24 billion in capital to bolster sagging capital which has been depleted by the credit crunch. Here in the states Sun Trust announced that Q1 profit dropped by 45 percent and that its provision for loan losses was being increased by a factor of ten as sagging home markets have taken a toll. Finally, in Germany one of those banks with a polysyllabic German name which Bloomberg identifies as a public sector lender (OK here it is: Dusseldorfer Hypothekenbank AG) has fallen victim to the worldwide credit crunch and and is being rescued by a consortium of German banks. The good folks at Bloomberg go on to note that this is the fifth German bank to suffer an untimely demise. The bank was not insubstantial in size as it had a balance sheet of $42 billion.

Economic data scheduled for release should show that the housing market remains in a deep slump as pundits expect existing home sales to drop to 4.92 million units on an annual basis from just over 5 million units annualized in the prior month.

The Treasury will auction 5 year inflation proteced bonds at 100PM New York time today.

Later in the week the Treasury will sell 2 year notes and 5 year notes. I would suggest that with the huge back up in rates and the significant flattening of the yield curve over the last month that these issues represent some value. There will be positive carry against a putative 2 percent funds rate and for the 5 year note a leisurely ride down the curve. It is a beautiful thing for the investor as each day when you flip the page on the calendar the yield on the issue will fall incrementally. Ceteris paribus, of course!

I would recommend buying each of these issues against the refunding supply which will be announced next week. These issues will be a great anchor against the Treasury sales of 10 year and 30 year debt at the May refunding.

I have no position in any Treasury issue or in any ETF which represents a piece of the Treasury curve. I am carrying a small but painful short position in the equity market via the ETF with the 1960ish appellation, SDS.

Have a great day.