Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities are registering, on balance, marginal price gains in overseas trading. The status of the Federal bailout of the financial industry dominates the trading landscape. Testimony yesterday by Paulson and Bernanke failed to assuage the skepticism of legislators, and while the package is not dead, momentum for passage has slowed. Questions abounded regarding executive compensation at assisted firms, aid to homeowners, oversight, and transparent pricing. I believe that ultimately the bill will pass but in a form which genuflects to the populist spirit spawned by the election season as well as some righteous outrage in Middle America over the excesses of the last decade.

Equity markets received a boost from the news that an avuncular billionaire from the heartland of America had invested $5 billion in financial powerhouse (and brand new bank) Goldman Sachs. Barry Ritholtz over at the Big Picture has an interesting article on why this is a great deal for Buffett and less than optimal capital formation for the good folks at Goldman Sachs.

The yield on the benchmark 2 year note is unchanged at 2.07 percent. The yield on each of the other benchmark Treasuries has declined by just a single humble basis point. The 5 year note stands at 2.98 percent, the 10 year note at 3.79 percent and the Long Bond at 4.37 percent.

The 2 year/10 year spread is tighter by 1 basis point and currently rests at 172 basis points.

The Treasury will dip its toe into the water today with an auction of $34 billion 2 year notes. If you miss that exercise they will immerse themselves entirely in the water tomorrow with an auction of $24 billion 5 year notes.

Economic data released overseas overnight was less than festive. Surveys of business confidence in Europe are noteworthy for their lack of confidence. The German IFO fell to 92.9 in September from 94.8 in August.

French business confidence dropped to 92 in September from 97 in July.

Business confidence in tiny Belgium took a real header as it dropped to minus 14.4 from minus 5.9.

With the press and the markets understandably focused on the financial crisis, there has been little fanfare about the real economy. The labor market remains weak as reflected in the weekly claims data and the upcoming labor report will show that business once again shed workers. Consumption has been soft and the weak labor markets as well as the generalized turmoil evident in the system will do little to inspire Mom and Pop to open their collective wallets. Look for weak consumption to continue. The recent turmoil in the financial markets will further restrain bank lending with deleterious effects on marginal borrowers seeking funding.

So the point is that even if the Congress passes a rescue package, the markets are not out of the woods as the stark reality of a very weak global economy colors investment decisions. Stocks should work irregularly lower and Treasury bond yields will drop as the Federal Reserve eases sometime between now and year end.

IG 10: IG 10 is opening about unchanged from last night’s close as it currently sits 159/160.

Comments

[whidbey:]

Your speculation on a fed easing is interesting. Your reading on the weakness in the economy is probably right, but one must wonder if the economy is a serious concern at the Fed these days, seemingly most of the effort is going into saving the banking system. Gold buyers seem to have lost heart today, is that because there is, so to speak, no tomorrow where inflation is concerned? They will print money like there is no tomorrow and maybe ease too, just depends on how bad this is and no one is talking. Will Ben B is talking but his credibility seems to be worn.

2008 Sep 24 01:51 PM