Bond Expert: Friday Outlook

| About: Merrill Lynch (MER)

Prices of Treasury coupons securities continue to march higher amidst global fears that economic growth will slow and that the level of growth will remain diminished for a protracted period. Against that background, the equity market rout which visited US equities yesterday continued around the world. Major Asian indices fell between 2.0 percent and 3.0 percent. European equities are down about 1.5 percent and the futures markets are predicting that the US market will not even achieve a dead cat bounce at the open.There was more troublesome economic data released in the overnight session. In Japan, business investment slumped 7.6 percent in the three months ended June 30th. Germany reported that Industrial Production plunged a greater than expected 1.8 percent in July versus expectations of a smaller 0.5 percent drop.

Analysts at Sanford Bernstein have published some dire forecasts for the housing market in the UK. They expect to see total peak to trough declines of 35 percent and if that comes to pass it will leave 1.8 million homeowners with mortgages which exceed the market value of their property. That would lead to additional problems in an already fragile banking system.

An equity analyst at the incubator of Treasury Secretaries (Goldman Sachs) has taken a shot at Merrill Lynch (MER) and placed the wounded investment house on its conviction sell list. The analyst anticipates more mortgage related write downs and thinks the equity is very rich.

In that environment, bond yields dropped yet again. The yield on the 2 year note slid 3 basis points to 2.15 percent. The yield on the benchmark 5 year note dropped 2 basis points to 2.83 percent. The yield on the benchmark 10 year note has dropped 3 basis points to 3.59 percent and the yield on the Long Bond has dropped 2 basis points to 4.24 percent.

There has been a mini rate interest rate cycle this week as rates have dropped sharply since the close of business on the Thursday before Labor Day, August 28th. The 2 year note closed that evening at 2.37 percent and has declined 22 basis points since that time. The yield on the 5 year note has dropped 24 basis points and closed that evening at 3.07 percent. The 10 year note closed trading that day at 3.78 percent and is 19 basis points lower in yield and the 30 year bond yield has tumbled 14 basis points from its close of 4.38 percent that evening.

Today is all about the labor report for August. The consensus expects a drop of 75K jobs. As I wrote last evening, the market and the claims data tell me otherwise. I think this will finally be the weak number which will have participants white knuckled.

I believe that investors are only beginning to believe in this rally. If the news is worse (for the economy) than expected I think many more accounts will be forced to buy and longer dated Treasuries should trade better than shorter dated paper.

Strap yourself in as the flight could be a rocky one.