Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities are retracing a portion of the outsized gains attained yesterday as some participants expect that some form of rescue package will pass later this week. Equity prices are mixed in Europe and futures market trading indicates the US equity markets will open with a strong bounce after the historic fall yesterday.The yield on the benchmark 2 year note has climbed 13 basis points this morning to 1.79 percent. The yield on the 5 year note has also jumped 13 basis points and it rests at 2.80 percent. The yield on the benchmark 10 year note has climbed 11 basis points to 3.69 percent and the yield on the Long Bond edged higher by 8 basis points to 4.19 percent.

The 2 year/10 year spread is 190 basis points this morning.

Notwithstanding the bounce in the stock market, the financial markets and the real economy face a host of problems.

Belgium has announced the rescue of Dexia [EBR:DEXB] which is (maybe was, now) the world leader in lending to public entities. The Belgian government cobbled together a $9.2 billion rescue package.

The Irish government announced a package which will guarantee deposits at major Irish banks.

Fitch placed Citibank’s (C) AA- rating on negative watch, citing (quite euphemistically) escalating asset quality challenges.

The personal income and spending data yesterday revealed a retrenching consumer. Real spending so far in Q3 is declining at a 2.7 percent pace.

Today the market receives several pieces of fresh data with the Chicago Purchasing Managers Index, the Conference Board Confidence Survey and the Case Shiller Home Price Index leading the charge.

Later this week the market awaits the monthly payroll report. The claims data continue to be weak and in this cycle we have not had a washout number. While employers continue to shed workers, the pace at which they are slashing payroll has been constrained. I think that is about to end as, in my opinion, the pace of hiring for the Christmas season should disappoint. I doubt retailers will plan for a robust holiday season.

In fact, the economic turmoil of the last few days and all of the press that it has attracted will probably lead to further belt tightening by consumers.

Credit opening:

Overnight Libor is opening sharply higher at 6.88 percent versus 2.57 percent. That reflects the pressures generated by the quarter end balance sheet date. However, the pressure is not confined to the overnight date as Libor rates are higher by 13 basis points to 30 basis points across the money market curve. One month rates are up 21 basis and three month rates have jumped 17 basis points.

The IG 10 has opened at 171, which is 11 tighter than the soggy close of yesterday.

Comments

[roswell007:]

Do I buy a junk bond fund now?

2008 Oct 01 12:50 PM