Friday's Bond Outlook: Strap Yourself In

Libor: Three month Libor set at its highest level since January at 4.33 percent. Here is a Bloomberg story on the topic.

Prices of Treasury coupon securities continued their inexorable grind higher in overnight trading as fears of a global economic slowdown widen and fears of a calamitous conclusion to this historic financial episode mount. The yield on the benchmark 2 year note has dropped 4 basis points to 1.57 percent. The yield on the 5 year note has dropped one basis point to 2.65 percent. The yield on the 10 year note has slipped 3 basis points to 3.60 percent and the yield on the Long Bond dropped 4 basis points to 4.11 percent.

Economic data released in the overnight session reinforce the weakness manifested in the US data released over the course of the week. Eurozone Services PMI declined to 48.4 in September versus 48.5 in August and the index remains near a 5 year low.

UK Service PMI fell to the lowest level ever seen in the 12 year history of that index. The index declined to 46 in September from 49.2 in August.

European retail sales declined 1.8 percent in August from year ago levels.

There are quite a few themes to choose from in the US today. The primary concern of traders as they march to their work stations is the level at which Libor is set. Most will be observing the number for some sign that the funding squeeze is abating.

That will be followed by the monthly labor data at 830AM New York. That is always a highly charged event but even more so as traders strain to see additional evidence that economic weakness is spreading. The consensus anticipated job losses for the ninth consecutive month and expected that payrolls declined by 95K in September. With so much other data falling off the cliff, I would not be surprised if the payrolls declined by about 150K.

And sometime later today the House will take a mulligan on the entire $700 billion bailout package, now encumbered with pork and patronage goodies which the Senate in its infinite wisdom appended to the original sparse bill. With several days to reconsider their actions I would be shocked if leadership fails to turn the necessary 12 votes.

Strap yourself in for another wild ride.

Comments

[whidbey:]

The 150K unemployment is just a start for the turn down. As a rule, once the 100K figure is reached it will take 6months to reverse to lower numbers. But the point is that the economy is floundering and the talking heads on CNBC were all saying the Fed cuts soon, maybe 50BP. This is lessen the damage to the economy. It is will, if it happens, result in less ammunition in the Fed's guns should the turn down worsen. The chances are that the economy will be worse in the months ahead a EU and Asia fall into slower economies and US export decline. Nothing is settled in the bail-out, if it enacted we still must see execution, none of which has been organized. We are months from any relief unless one counts sentiment, which might rise a little, for a while, may be.

2008 Oct 03 09:27 AM

[Reader851:]

OK, Sherlock, how about pointing this out about LIBOR? From Roubini's Blog, 10/3:

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:

LIBOR bid only, no offer.
Commercial paper market shut down, little trading and no issuance.
Corporations have no access to long or short term credit markets -- hence they face massive rollover problems.
Brokers are increasingly not dealing with each other.
Even the inter-bank market is ceasing up.

2008 Oct 04 08:13 AM