Bond Expert: Tuesday Outlook

Includes: ERO, GBB, JYF, UUP
by: John Jansen

Prices of Treasury coupon securities are registering small mixed changes in overnight trading. The gloom which hung over the US markets yesterday remains today and motivated trading in foreign markets. Asian equities fell in sympathy with the steep decline in US equities, and as the concerns of investors in that region regarding the health of its banking system bubbled to the surface.

European Stocks are in decline this morning, partly reflecting the US declines, too, but also responding to some genuine home-grown weakness.

The important German IFO measure of business sentiment slipped to 94.8 in August from 97.5 in July. Paid prognosticators has anticipated a reading of 97.1

The current conditions index dropped to 103.2 from 105.6. The expectations index slipped to 87.0 from 89.9

In the UK mortgage approvals sank to an 11 year low in July .

In Switzerland (in all my years I do not believe I have ever cited a piece of Swiss data) consumption remains positive but it slipped significantly in July.

I failed to note earlier that factory production in Singapore fell 1.8 percent in July. The salient point here is that as sales slow in the US and Europe, Asian exporters will suffer.

The economic weakness in evidence elsewhere has redounded to the benefit of the mighty greenback. It has posted marginal gains against the yen but is soaring versus the Euro and the pound sterling. The Euro is trading at a six month low versus the dollar this morning. The dollar is so strong that I fully expect one of the speakers at the Democratic convention this week to reprise the William Jennings Bryan “Cross of Gold” speech in a modern context.

The yield on the benchmark 2 year note has declined a basis point to 2.32 percent. The yield on the 5 year note has slipped a basis point to 3.03 percent. The yield on the 10 year note is unchanged at 3.79 percent and the yield on the Long Bond has climbed a basis point to 4.40 percent.

The 2 year/10 year spread has moved wider by a basis point to 147 basis points.

There is a spate of US data today with reports on housing and consumer confidence as well as the minutes of the last FOMC meeting.

In addition to the scheduled reports, investors will scour the wires and the rumor mill for signs of credit weakness. In particular the trials and tribulations of FNMA (FNM) and Freddie Mac (FRE) will remain in the spotlight. Any fresh signs of weakness will have the sharks circling the potential victims in the shallow waters.

The bond market rallied yesterday in spite of heavy supply on the calendar for the remainder of the week. I think that the gloom in the market place is so pervasive that the concessions for the upcoming auctions will come on a spread basis rather than a significant price concession.

Some overnight flow:

Central Bank and Hedge Fund sellers of 10 years.

Central Bank buyers of 2 years.

Central bank buyers of callable agencies.

Japanese receivers in 2 year and 3 year sectors.