Thursday's Bond Outlook: Oil's the Critical Headwind

Prices of Treasury coupon securities, on balance, posted modest losses in overseas trading and the yield demonstrated a propensity to flatten. The yield on the benchmark 2 year note gained to basis points and currently trades at 2.42 percent. The yield on the benchmark 5 year note also rose by 2 basis points and it sits at 3.10 percent. The yield on the 10 year note is higher by 1 basis point at 3.82 percent. The Long Bond is virtually unchanged at 4.54 percent. The 2 year/10 year spread has narrowed by a basis point to 140 basis points.Equity markets around the globe were mostly lower and the bugaboo of high oil prices weighs on sentiment.

Currently most stocks in Europe are lower by anywhere from 0.5 percent to 1.0 percent. Stocks in London have bucked that trend and are slightly higher as retail sales declined less than expected. Japanese equities posted modest gains as exporters bounced on strength in the dollar. Stocks in mainland China declined as the higher price of oil took its toll and the lingering financial consequences of the tragic earthquake weighed on sentiment, too

Futures market trading indicates a modest rebound for US stocks after the sharp losses of the last two days.

The only economic report today is the initial jobless claims data, and analysts expect little change from the 371K of the prior week.

One of the salient points in the FOMC minutes yesterday was the change in economic forecast by the Committee. I alluded to it but failed to explicitly state it. For the record, they reduced their estimate of GDP for 2008 to a range of 0.3 percent to 1.2 percent from 1.3 to 2.0 percent. They raised their estimate of CPI ex food and energy for calendar year 2008 to 2.2 percent to 2.4 percent from 2.0 percent to 2.2 percent.

In the near term, oil will remain the critical headwind against which all the markets will labor. The various news services have reported that oil has traded above $135 already today. I would submit that the easy money has been made in that trade and what we are witnessing now is the minnows rushing to the shallow waters.

The price of oil has doubled in the past year and in a broader historical view it is up by nearly a factor of seven since 2002 when it traded at $20. This does not seem to be the proper place to be establishing new long positions. The recent price action smacks of panicked short covering as well as the entrance into the market of those chasing the latest hot trend.

These are the same folk who brought you Nasdaq 5000 and the dot com bubble and subsequent bust. I would be willing to feed the current demand and wait for a retracement of a portion of the recent bubble like move.