Bond Expert: Friday Outlook

Prices of Treasury coupon securities are surging in overnight trading as markets react to the breakdown of negotiations in the US to craft a deal which would unshackle the bound and constrained credit markets. The yield on the benchmark 2 year note has dropped 15 basis points to 2.01 percent. The yield on the 5 year note has slid 13 basis points to 2.96 percent. (That is a less than salutary outcome for US taxpayers as that issue was auctioned less than 24 hours at a yield of nearly 3.13 percent.) The yield on the benchmark 10 year note has dropped 6 basis points to 3.79 percent and the yield on the Long Bond has edged lower by 4 basis points to 4.37 percent.The 2 year /10 year yield spread has widened 9 basis points to 178 basis points.

Major central banks engaged in coordinated action to provide liquidity over quarter end with an injection of one-week money. England and the ECG each added $30billion and the Swiss chipped in with $9 billion.

In conjunction with these actions the Federal Reserve increased its swap lines with the ECB by $10billion and with the Swiss by $3billion.

There was some economic data overnight.

The Swiss equivalent of a leading indicators index dropped to a 5 year low.

French consumer confidence unexpectedly posted an increase to -44 from -47.

German inflation at the state level moderated.

In the US, we will await revised data on Q2 GDP as well as personal consumption data and the PCE for Q2.

Additionally, the University of Michigan will release its survey of consumer sentiment.

Trading today will focus on the discussions in Washington and the very fragile psyche of the money markets.

It will be very volatile, once again, and traders will be subject to frequent tape bombs.

IG 10: The IG 10 has traded as wide as 175 this morning and I recently observed a 170/173 quote.

It closed yesterday at 160 1/2.

Libor: Three month Libor is pretty much unchanged at the elevated level of 3.76 percent. The market remains dysfunctional and most trading is confined to the very short maturities.

Down Under:   Australia will spend about $ 4 billion purchasing residential mortgages to unclog the credit markets in that country.

Comments

[JasonC:]

Some Wachovia bonds are trading around midday at 60 and even 50 cents on the dollar, for notes with 5-6 months to run. Dealer yields 155-306%. Note that Wachovia is still rated investment grade by the agencies. But after WaMu and inaction in Washington...

2008 Sep 26 12:18 PM

[whidbey:]

The trend in yield is saying that fear at the end of every day is the dominant emotion. No one trusts the weekend convocations? Who is on the roster awaiting the gentle processes of the regulator? Wachovia follows WaMu I guess. In the end this can not be good for housing market, or have we stopped worrying about MBS/CDS now that the Congress is fixing things?

2008 Sep 26 04:40 PM