Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities are posting solid gains in overnight trading and the propensity of the yield curve to steepen which manifested itself yesterday was still evident.

The yield on the benchmark 2 year note slipped 8 basis points to 2.04 percent. The yield on the 5 year note dropped 7 basis points to 2.97 percent. The yield on the 10 year note has dropped 5 basis points to 3.78 percent. The yield on the 30 year bond tumbled 4 basis points to 4.39 percent. The 2 year/10 year spread has widened by 3 basis points to 174 basis points.

The steepening of the curve is particularly significant as it comes amidst a moment of historic supply in the front end of the market. The heavy schedule of Treasury issuance this week includes a year bill auction of $20 billion and a 2 year note auction for a record $34 billion.

The markets remain fixated on the financial and credit crisis which grips the system. Bloomberg reports that some of the price gains in overnight bond trading stem from fear that the rescue package might unravel.

The high point of the day will be the testimony before Congress of the Bernanke, Cox and Paulson triumvirate. They will publicly make the case that financial Armageddon will ensue if the package does not pass in some form which closely resembles their original submission.

I am sure that amidst the political posturing of some of the jejune political folks there will be some intelligent questions. I think that the savvier amongst the politicos will focus on the need for oversight and the need for some reasonable method of price discovery.

In other news, the European PMI for services and manufacturing reflect weakness. The service sector PMI increased a tad to 48.2 but remains below 50 and the manufacturing portion slipped to 45.3.

Italy cut its growth forecast to 0.1 percent from 0.5 percent.

The Spanish economy minister sees the first contraction in that country in 15 years.

Overnight Libor has dropped slightly but Libor levels from one week to one year are generally one basis point to three basis points higher at the setting this morning.

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The Fed has released the text of the prepared statement which Chairman Bernanke will deliver before the Congress at 1000AM. I had posted some headlines which someone had sent to me.

I gave the text a quick read and it is mostly a recitation and narrative on recent happenings. In my opinion it does not break any new ground.

Comments

[whidbey:]

The new ground will come from the legislative side of the hearings. They want, as usual, to not only reform financial services, but add to consumer financial resources. This is not pure politics, but real concern over the consumer capacity to do much even if the financial system is reformed. In short, first we avoid a wipe-out, but can not hope for anything better.

2008 Sep 23 09:18 AM