Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities have retreated in overnight trading as the gloom and doom which coursed through the veins of the market yesterday has faded somewhat. The worldwide equity rout of yesterday is more of a skirmish today. Most European exchanges are posting gains in the 1 percent to 2 percent area. Australian equities surged on a 1 percent rate cut in that country.In Asia the Hang Seng fell 5 percent and the Nikkei declined 3 percent as credit fears and recession fears have not abated there.

Futures trading suggests that US stocks will open modestly higher this morning.

In the money markets, Libor has set 4 basis points lower in yield this morning. My contact in the money markets says that the mood is still apprehensive and the market has the feel of a patient on a gurney waiting for transport to the operating room.

The operating room metaphor relates to the talk in the market and the press and even here in the blogosphere that the Federal Reserve will act to ease the strains in the commercial paper market. How such a plan would work has been the subject of much speculation.

The money markets are still frayed and nervous as Iceland is in the throes of a liquidity crisis and UK banks face funding problems. Iceland is negotiating a loan from Russia and there are reports that her Majesty’s government will inject capital directly into some troubled institutions.

I think the conclusion is that the “in extremis ” state which prevailed in the short term money markets yesterday has given way to a cautious optimism. However, that cautious tone could quickly morph into fear once again if events overtake the market or if the Federal Reserve fails to placate participants with some sort of warehouse for commercial paper.

The yield on the benchmark 2 year note has climbed 5 basis points to 1.48 percent. The yield on the 5 year note has climbed 4 basis points to 2.48 percent. The yield on the 10 year note has increased 4 basis points to 3.50 and the yield on the Long Bond is 3 basis points higher at exactly 4.00 percent.

There is a dearth of meaningful economic data today. The market will take its cue from activity in the equity markets and then from the words of Chairman Bernanke when he speaks “ex cathedra” at 115PM New York time.

 

Comments

[JasonC:]

The big news abroad yesterday wasn't the Australia cut or Iceland, important as either would be in other circumstances. It was Royal Bank of Scotland. Its stock declined 30% to 90 pence and trading in it was then halted by regulators. This is a $3.2 trillion bank.

I warned on RBS a week ago Monday in a comment on this column. It poises systemic risks of the highest order. The article correctly points out they are in talks with the government to shore up bank capital with public funds. That is a long overdue move.

The populist fever hasn't broken yet, but authorities are at least starting to see the deadly costs of indulging it, and pulling back from the brink. When they realize dumping on bankers instead of helping them will just send everyone to a warm place on a time scale of weeks, we will see the bottom.

2008 Oct 07 08:11 AM