Bond Expert: Monday Outlook

by: John Jansen

Prices of Treasury coupon securities surged in overnight trading as economic weakness and credit fears motivated investors to seek the relative safety of Treasury securities.

ANZ bank in Australia reinforced the notion that the banking sector will remain troubled as it tripled its provision for bad loans.

In Germany, consumer confidence fell to a 5 year low as surging energy prices weighed on sentiment and offered another sign that Europe’s largest economy was slipping.

Finnish Consumer Confidence was at a 6 year low as it fell to 6.5 percent in July from 10.2 percent in June.

Spanish Home sales fell 34 percent year over year in May as the highest mortgage rates in 8 years sapped demand for homes. Property firms reported a glut of unsold homes with inventory standing at 1.5 million units.

Toyota (NYSE:TM) has observed slumping demand for autos and reports indicate the firm will slash full year production to 9.5 million units from nearly 10 million units.

The yield on the benchmark 2 year Treasury note has slipped 6 basis points to 2.65 percent. The yield on the benchmark 5 year treasury has dropped 3 basis points to 3.40 percent. The yield on the 10 year Treasury has declined 2 basis points to 4.07 percent and the yield on the Long Bond has fallen 2 basis points to 4.07 percent.

The 2 year /10 year yield differential has climbed to 142 basis points.

The US Treasury will announce the details of its quarterly refunding package on Wednesday. The Treasury will probably offer $15 billion new 10 year notes as well as $10 billion new Long Bonds. In my opinion, that supply should weigh on the market and should keep the yield spreads between those issues and the 2 year note widening. I think that the 2 year/10 year spread can eventually move out to the wider end of its trading range and trade in the mid 150s before the refunding process has finished.

This will be an active week for economic news, there is none today. As the week unfolds participants will glimpse the Employment Cost Index and the Advance Report on Q2 GDP.There are reports from the Purchasing Managers group in Chicago as well as the national report from that group. Friday will bring the monthly labor data with which will provide a fresh snapshot of the labor market.

In the interim, participants will fret nervously about credit and will carefully observe the credits markets for signs that some large financial institution has come unglued.

Some overnight Treasury flow:

Bank selling of 2 year sector

Spec sellers of 5s

Central bank sellers of 10s

Japanese end user buying 10s.