Bond Expert: Thursday Outlook

Prices of Treasury coupon securities have uniformly sagged across the curve in overnight trading. The yield on the benchmark 2 year note has increased by a little more than 3 basis points to 2.29 percent.

The yield on the 5 year note has jumped by 3 basis points also and sits at 3.05 percent.Three seems to be the lucky number this morning (think parallel shift) as the yields on the 10 year note and the 30 year bond have posted increases of about 3 basis points, also, with their yields at 3.76 percent and 4.49 percent,respectively. The 2 year/10 year spread currently trades at 147 basis points.

Equity markets around the globe are not sending any strong signals . Asian markets posted modest declines with modest losses in Japan and Hong Kong. The FTSE in London is posting modest losses as financial shares dip. Major exchanges on the European continent are closed as those countries celebrate and exalt the proletariat on Labor Day. Futures market trading points to modest gains in US equity markets when trading resumes this morning.

The bond market braced for a data deluge yesterday and survived. On balance, the data were weakish but not so weak as to change opinions regarding the near term course of interest rates. The FOMC lowered rates as expected but the statement which accompanied their action was not as clear about the direction of rates.

Today there is another data tsunami with several important releases for investors to absorb.I have always been partial to the initial claims data as tool because it is contemporaneous and provides evidence real time regarding the mindset of businesses. After rising recently this indicator took a dip below 350K so it will be interesting to see if that is merely transitory or the start of a new trend.

Today will also bring the report on core PCE which the Federal Reserve touts as its preferred inflation metric.Pundits expect that indicator to show that inflation rests at the outer edge of the 2.0 boundary which the Fed deems acceptable.

I think that yields will have a tendency to rise over the next several days as traders set up for the refunding next week. The supply and demand forces favor a steeper yield curve in the near term, too. Last week the Treasury issued 2 year notes and 5 year notes and that paper has proceeded in an orderly fashion through the distribution process and has cleaned up nicely.

I also noted yesterday how the net paydown by the Treasury on May 15 will keep the front end of the Treasury market very well bid as that $50 billion seeks a home. So the supply and demand factors will favor the front end as the markets seek a level at which the 10 year and 30 year offerings will clear. In my opinion, the 2year/10 year spread will be in the 150s by the time the street bids the paper next week.

It is called shooting the taxpayer in the big toe!