Prices of Treasury coupon securities have posted marginal gains in overnight trading. The benchmark 2 year note yields 2.38 percent. The benchmark 5 year notes yields 3.09 percent. The 10 year note yields 3.83 percent and the Long Bond yields 4.46 percent. The 2 year/10 year spread is 145 basis points.
The economic backdrop which confronts fixed income market participants is one of economic weakness and financial fragility.
The Bank of France has issued a forecast for Q3 economic growth and they forecast a paltry gain of 0.1 percent. The Bank of France publishes a monthly barometer of business sentiment and it slipped to 92 in July from 95 in June. As recently as February it had registered 105.
The Bundesbank reported that it expected a “dry spell” in the second half of 2008 but ominously it also noted that slower economic growth may not be enough to curb inflation.
In the UK, the Chamber of Commerce warned that the economy faces possibility of recession in the next 6 months to 9 months and that the next two years would be a difficult period.
The Bank of Japan is meeting and markets are awaiting its announcement of its decision. The consensus looks for rates to remain unchanged with an assessment that economic growth will slow.
Barrons reported over the weekend that the Treasury is poised to recapitalize FNMA and Freddie Mac. In so doing they would throw holders of existing common shares, preferred shares and subordinated debt under the metaphorical bus. The article claims that after for accounting stratagems and machinations each GSE has a net worth of about $50billion.
Last week there was a spate of bond sales by some large cap financial enterprises. It was a difficult process and the firms paid dearly to raise money. I think the most instructive case is American Express (NYSE:AXP) as it highlights the fragile state of the financial system and the hurdles that confront large cap financials. This debt sold at a junk bond spread of T+425 basis points.
American Express is a premier name. (I guess I should be writing that in the past tense rather than the present tense.) The market judges the situation so dire that it exacts this penalty rate from that company. What will happen to the myriad of borrowers further down the credit curve?
They will have an increasingly difficult time raising money and the current soft patch of weakness will turn much rougher.
I failed to catch this story a bit earlier. UK home prices registered their largest drop (nearly 5 percent) since record keeping began six years ago.
Some Overnight Treasury Flow:
Hedge fund sellers of 10 year.
Hedge fund sellers of 5 years.
Asian end users buying 5 years.
European sellers 2 years.
Japanes receivers in 10 years.