Bond Expert: Monday Outlook

Prices of treasury coupon securities have declined modestly in overseas trading. The yield on the benchmark 2year note has climbed a basis point to 2.60 percent. The yield on the benchmark 5 year note has increased by 2 basis points to 3.30 percent. The yield on the 10 year note is also up 2 basis points to 3.98 percent and the yield on the Long Bond is higher by 1 basis point at 4.55 percent.The 2 year/10 year spread has flattened a basis point to 138 basis points.

European stocks are higher following declines in major Asian indices. Futures market trading indicates that the US market will have a robust opening.

There is no meaningful economic data today. Investors will sift through the news to try and make some sense of the announcement of the US bailout of FNMA and Freddie Mac. There is a singular lack of flesh on the bones and until there is a legislative proposal it is difficult to fully assess this situation.

I think we can say that the Treasury has offered to place the GSEs on financial life support. Patients who need to be attached to a respirator are generally in very serious condition. It is a medical procedure performed in the direst of circumstances.

I think that is the salient conclusion that we can draw at this juncture from the actions of the Treasury and the Federal Reserve. There is a multitude of problems which the system confronts. The banking system is still starved for capital and is likely to be for some time. Risk aversion is ascendant and the cowboy philosophy that reigned supreme has been tamed.

Consumer confidence has been drained by high energy prices, a soft labor market and declining home prices. Home prices continue to fall, albeit and a diminished pace.

All of the problems which confronted policymakers before the weekend remain with us. Mr Paulson did not wave a magic wand and make them go away.

It looks as though we are off to a surprisingly slow open. I think that investors hope to get their bearings today and possibly look to Mr. Bernanke for some guidance tomorrow. I think trading volumes are likely to be light, and in a thin market there should be ample volatility as traders refrain from risk taking.

Comments

[richjoy:]

On the contrary, I think trading volume will be very heavier. I agree there will be volitility, and a tension between the bottom-seekers and those wanting to get out of their positions on price improvements.

However, in the bigger picture, what has happened?...FNM and FRE have been bailed out, all our other problems remain.

So at 4pm, I expect the market to have come back to only a modest gain.

2008 Jul 14 08:56 AM