Bond Expert: Wednesday Outlook

Includes: IEF, IEI, SHY
by: John Jansen

Prices of Treasury coupon securities are, on balance, registering modest losses in overseas trading. The losses in contrast to the very sharp gains yesterday are rather subdued and yields remain bear cycle lows. The yield on the benchmark 2 year note has climbed 2 basis points to 2.28 percent. The yield on the 5 year note has held steady at 2.99 percent. The yield on the benchmark 10 year note has climbed a basis point to 3.74 percent and the yield on the Long Bond also climbed a basis point to 4.36 percent.The 2 year/10 year spread narrowed one basis point to 146 basis points.

There is a plethora of news from overseas venues this morning.

Revisions to previously data confirm that the Eurozone economy did shrink 0.2 percent in Q2 from Q1. It is the first quarterly decline since the inception of the series in 1995.Year over Year the economy grew 1.4 percent which was a tad lower than the initial report of 1.5 percent. The principal reasons for the weak results were the softness in investment and in consumption.

Retail sales fell 0.4 percent month on month and 2.8 percent YOY. June data were revised lower to a month on month decline of 0.9 percent and YOY drop of 3.2 percent.

Eurozone PMI increased to 48.5 from 48.2 and UK PMI remained in contraction territory but jumped to 49.2 from 47.4. Pundits had expected the UK measure to decline to 47.

Australian GDP rose 0.3 percent quarter over quarter and 2.7 percent YOY. One report described the data as unsurprising and validating the rate cut by the Reserve Bank.

Ospraie Management Limited announced that it had suffered large losses in commodities trading and was shutting it s flagship fund. The fund is down nearly 39 percent for the year. The fund is 20 percent owned by beleaguered investment bank Lehman Brothers (LEH).

The dollar continues to be the currency of choice as it breaks new ground against sterling, yen and the Euro. Oil and other commodities remain under pressure.

There is a dearth of high profile data in the US today as participants brace for factory orders data and car sales in August. The Fed will release the Beige Book, too.

Risk aversion is still the order of the day and I expect it to remain so as we approach quarter end. There are more stories about Lehman Brothers this morning and I believe that Fannie Mae (FNM) and Freddie Mac (FRE) will never quite be out of view. Indeed, the Wall Street Journal never misses an opportunity to hammer those entities and did so this morning with a story discussing the reduced Chinese appetite for these names. In my mind the lack of more serious profit taking in overnight trading speaks volumes about the level of fear traipsing through the credit markets. It is ugly out there but I think it will get uglier still before the game is over.