Bond Expert: Monday Outlook

Update - Corporate Spreads:

Some analysts believe that corporate bond spreads should be under some near term pressure to widen. They note that the post Bear Stearns rescue rally is getting long in the tooth and that has prompted some profit taking from some who caught that wave. Supply has been heavy and is expected to remain so and that has begun to weigh on sentiment.

The AIG announcement last week highlighted the ongoing woes of financial sector firms and has participants looking ahead to the earnings announcements of Goldman, Lehman and Morgan Stanley. Each of those firms has a May 31 quarter end. (Formerly, there was a firm with appellation Bear Stearns with a May 31 end date but they are now an inglorious Wikipedia entry in financial history.) The weakness at AIG has spawned concerns about earnings quality at those investment banks.

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Prices of Treasury coupon securities have registered mixed results in quiet overseas trading with most issues registering modest losses. The yield on the benchmark 2 year note is unchanged at 2.24 percent. The yield on the 5 year note has increased by 1 basis point and rests at 2.98 percent.

The yield on the actively traded 10 year note has also increased by 1 basis point and is currently at 3.78 percent. The Yield on the Long Bond has jumped by 2 basis points to 4.54 percent. The 2 year/10 year spread has widened 1 basis point to 154 basis points.

Equity markets around the globe have posted modest gains overnight. The Nikkei in Japan has advanced 0.6 percent as weakness in the yen has boosted exporters. Australian stocks are 1.0 percent higher as takeover news in the banking sector sparked hopes of consolidation and merger in that sector. European shares received a boost from discovery of oil in the North Sea and a sanguine outlook for commodity companies. In general European shares were better by a little more than 0.5 percent. Futures market trading indicates that US equity markets with modest gains.

There is no meaningful economic data today, though the week in replete with data which should demonstrate that the US economy remains mired in a soft patch. Retail sales are expected to be flat but higher by 0.2 percent ex autos. I want to observe this number ex gas and note the results when one controls for the sharply higher price of gasoline. (As an aside I had dropped my daughter and her husband at MacArthur Airport in Islip New York last night and while driving home on the busy Sunrise Highway spotted an Exxon station with regular grade gas at $4.09. So that barrier is breached here.)

Other data on the docket includes Housing Starts which should post a small decline. Industrial Production and the Philadelphia Federal Reserve Index of Manufacturing are also expected to register small declines. The University of Michigan Confidence Survey will also remain at multi year lows reflecting consumer angst about high energy prices and soft labor markets.

I do not have a strong opinion about the near term course of interest rates. It seems that for the time being we are range bound. Robust demand emerged at the high yields attained during the refunding process. So a backup into the high 3.80s on the 10 year note would likely attract buyers while a run to the low 3.70s on that same issue would bring in sellers.

As I noted earlier the economic data this week should be on the soft side. For that data to move yields significantly lower, the data, in the aggregate, would need to be much weaker than expected. If I were forced to focus on one item I would watch the retail sales data to judge the strength or lack there of in consumption.

Have a great day.