Friday's Bond Outlook: Buy 3-Month Bills and Canned Tuna

Prices of Treasury coupon securities have posted modest gains in overnight trading amidst a news cycle which has generated some angst amongst the equity crowd. AIG initiated the queasy feeling when it announced a gargantuan loss for Q1 of nearly $8 billion and credit losses of $15 billion. Oil surged to nearly $125 per barrel and sparked fears of inflation and a collapse of discretionary spending by strapped consumers.And not to be outdone the overnight press is replete with stories that Citibank will look to shed $400 billion of non core assets over the next several years.

Most of the preceding I have lifted from the Financial Times. There are several other stories on the home page of that fine periodical which I will not chronicle here but suffice to say that if you read those in addition to these which I have cited ,then you will quickly race out to buy three month bills and canned tuna.

The yields on each of the benchmark Treaury issues which I normally recount have declined by about 3 basis points. The yield on the benchmark 2 year note is 2.19 percent and the yield on the 5 year note is 2.94 percent. The benchmark 10 year yields 3.75 percent and has rallied 19 basis points since its auction on Wednesday.The Long Bond yields 4.51 percent and has rallied 9 basis points from the level at which it auctioned yesterday. The 2 year/10 year spread is steady at 156 basis points.

The only economic data slated for release is the Trade Balance for March. Economists expect a slight decline from the previous month.

Equity markets around the globe have trembled in overnight trading in response to the less than festive news. The Nikkei and the Hang Seng have slipped 2.0 percent and 1.5 percent respectively. Most European exchanges have dropped by about 2 percent. Futures market trading points to a sharply lower open for US stocks when the trading day begins.

The overnight news reminds investors that the residue of the subprime crisis and lingering credit crunch remains with us and will not easily wash away. We are well over a year into this story cycle and even that far along a high profile company such as AIG can surprise participants with a shocking announcement as they just did. Similarly, the Citibank story is a source of concern. The sheer size ($400 billion) of the assets to be disposed of insures that the process will not conclude anytime soon. Additionally,the announcements by each of these giant companies reinforces the notion that there are more surprises lurking in the wings.

Comments

[Whidbey]

The only thing we can marvel at is the below-inflation rates of return on treasuries. This certainly not due to any desire for returns on capital. It must be that the return of capital is the goal. Avoidance of the Fear arising from the unknown in the bank sector is worth 200 bp? We know banks are rotten, we can occasionally glimpse the damages, but we wonder, "if they are showing about this (e.g. AIG), what are they not willing to reveal?" Horror show, just act one of a three act play in which the audience is wiped out in act three.

[R Naylor]

I remember the chief trader at Barings in 1973 expounding at the dining table the virtues of tins of tuna fish in olive oil. Harking back to the post war German hyperinflation when cigarettes were the currency he said that, provided one turns the tins over annually, the food will last forever, retain its useful small value trading ability and if worse came to worse - eat it!

[adan]

great no-nonsense post, perfectly concluded with: "...the announcements by each of these giant companies reinforces the notion that there are more surprises lurking in the wings."

re the above comments re inflation, thomas jefferson's late 1700's quote always comes to mind, simplifiying: we'll be inflated to be deflated

[gordon]

Why no media talk about Bush-Paulson-Bernanke crushing those depending on savings, 3-month CDs under 3%? How is that affecting seniors?
The trade balance showed imports dropping more than 2%, Americans aren't buying "stuff " (food, gasoline instead)any mention of that big decline?