Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities, on balance, have registered minimal losses in a lackadaisical overnight session with little in the way of high profile news. The yield on the benchmark 2 year note edged higher by a basis point to 2.33 percent. The yield on the 5 year note is virtually unchanged at 3.04 percent. The yield on the 10 year note increased one basis point to 3.78 percent. The yield on the Long Bond climbed by one basis point to 4.39 percent.The 2 year/10 year spread is unchanged at 145 basis points.

The Treasury will flood the market with an auction of $32 billion 2 year notes today. If the very quiet tone persists, there should be some orderly underwriting process in which the street exacts some concession from the taxpayers for their profligate ways. I would expect that the 2 year note will cheapen to surrounding issues and will be a nice anchor for trades against the $22 billion 5 year notes the Treasury will offer tomorrow.

One source of demand for these notes is the central bank community. Their activity this month will be instructive as conventional wisdom holds that the central banks have shunned the plain vanilla MBS market and the agency market. It will be interesting to note the level of indirect bids to see if that money has found a new home in the Treasury market.

There is one noteworthy economic report today and that is the Durable Goods report at 830AM New York time. Economists expect a flat report this month.

The Wall Street Journal has a report this morning that the FDIC may need to tap the Treasury for money as the pace at which banks fail quickens. The FDIC fund is depleted and as banks fail at an increased pace the FDIC will need the money to make depositors whole.

Economic data released overnight was weakish in tone but was not of the top tier variety.

New Zealand business confidence rose for the first time in six months. A small percentage of respondents ( 4.7) expect sales improvement in the next 12 months versus 8.2 percent who had expected a decline in the previous survey.

Japanese stocks declined modestly as Sohken Homes filed for bankruptcy.

CPI in four German states fell modestly as the price of oil decline sharply from its peak.

Spanish GDP grew at its slowest pace in 15 years in Q2 with a rate of expansion of just 0.1 percent.

In the UK, its largest home builder ,Taylor Winney, reported that it lost $2.6 billion in the first six months of 2008.