Thursday's Bond Outlook: Bracing For Data

Prices of Treasury coupon securities extended their swoon in overnight trading as stronger than expect GDP data for the Euro region drained strength from fixed income markets and bolstered equity markets. The yield on the benchmark 2 year note has climbed 5 basis points to 2.57 percent. The yield on the 5 year note gained 4 basis points to 3.24 percent and the benchmark 10 year note added 3 basis points and rests at 3.94 percent. The yield on the Long Bond also increased by 3 basis points to 4.64 percent.

The 2 year /10 year spread is at 137 basis points. The spread has not traded at that tight a level since mid January.Some technicians with whom I converse have focused on the 200 day moving average on the 10 year note as a Maginot line of sorts. I no longer have Bloomberg access and I have not been able to come up with a chart which will give me the exact level for the 200 day moving average but eyeballing the chart on a Wall Street Journal page it appears that the 200 day moving average is currently around the 4.05 percent yield level.

Equity markets around the globe are mostly posting small mixed changes. Of the major markets the Nikkei has experienced the biggest move as it gained nearly one percent. Futures markets are indicating that the US market will open with a modest gain.

The markets brace for a plethora of economic data today. I always favor the initial claims data as a key indicator because it is practically real time. Initial claims have not spiked in the manner that they have in past recessions and at current levels around 370K are rather subdued. There has been a sentiment change in the markets which suggests that the economy is not as weak as many had previously believed. The claims numbers can reinforce that belief if they hover around the current level.

That sentiment change has worked to the detriment of Treasury debt. Spread product is in vogue and investors enthusiastically pile into corporates, mortgages and agencies. The Federal Reserve has exacerbated the problem as its efforts to provide liquidity have resulted in massive sales of Treasuries by the Open Market Desk. Some forecasters believe that the Desk will sell an additional $30 billion to $40 billion of notes in the near term. That only adds to the markets lethargy.

I suspect that the market will breach the 4.00 percent level on 10 year notes and then there will be a steel cage death match between the bulls and bears around the 200 day moving average level.

Have a great day.

JJJ