Bond Expert: Monday Outlook

Prices of Treasury coupon securities have posted mixed results in overseas trading . The yield on the benchmark 2 year note has slipped 2 basis points to 2.40 percent. The yield on the 5 year note is unchanged at 3.18 percent. The yield on the benchmark 10 year note is one basis point higher at 3.88 percent and the Long Bond is the underachiever in the group with its yield 3 basis points higher at 4.62 percent. The 2 year /10 year spread has widened 3 basis points to 3.88 percent.

Equity markets around the globe are still ebullient. Major Asian markets and the Australian markets registered modest increases and most European exchanges are higher by about one percent. Futures markets trading at the present time indicates modestly higher prices for US markets when they open about two hours hence. If the market maintains current futures market levels, the S and P will trade above 1400. Long time readers ( all the way back to January 2,2008 ) know that I am not a chart geek but do occasionally employ them as an informative tool. I think that they are useful here as the market has rotated around the 1400 level several times since the advent of the credit crunch in early 2007. I think it would be a significant event if the market can sustain trading above that level and close above it.

This is a watershed week for economic data but none of it is today. The Bloomberg page listing of data scheduled for release this week is as lengthy as I have ever seen. The most important data point of the week will be the FOMC announcement at the conclusion of its meeting on Wednesday. The market anticipates a 25 basis point cut in the Federal Funds rate and can probably live with the announcement of a pause.

Amidst the confusing gaggle of data, I would focus on the employment data on Friday. It will give a clear indication of the severity of the recession and the breakdown of job losses across industry groups will give investors a clue regarding how widespread the weakness is or if has been contained in housing and residential construction. (I would mention the manufacturing sector but it was hemorrhaging jobs before subprime came into being.)

Inflation data will also be assiduously parsed as it remains a concern of the apparatchiks at the Federal Reserve. So observe closely the Core PCE data for clues on the behavior of prices. It is the Fed’s favorite inflation indicator.

Some Overnight Treasury Flow

Asian buyers of T bills and very short agencies.

Real money buyers of 5s.

Derivative based sellers of 10s.

Hedge fund buyers of 5s.

Central bank seller of off the run 10s.

Japanese seller of 10s.

Central Bank buyer of 2s

Treasury Refunding Announcement

I failed to mention earlier that this week the Treasury will burden the market with the announcement of the May refunding. That will consist of a new benchmark 10 year note (around $15 billion ) and a reopening of the 30 year bond (around $6 billion.)

They will also recalibrate their forecast of Treasury borrowing needs for the current quarter. This quarter is generally a friendly one for the Treasury because tax payments stream into its coffers. The Treasury had announced in January that it expected to paydown $122 billion of debt in this quarter. They will update that forecast with the refunding announcement on Wednesday. It is not pretty as they will likely say that with the fiscal stimulus package and the deteriorating economy that the once grandiose paydown that they had envisioned has been whittled down and the paydown for the quarter will be only about $25 billion. What is nearly $100 billion amongst friends?

Separately,given the gargantuan borrowing needs of the Treasury, some forecasters expect that officials will announce the reintroduction of the year bill. It was a great trading vehicle but was never overwhelmingly popular with investors.