Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities were mostly lower today as the market suffered through a lackadaisical session. I still have a concern about the legs of the rally in the treasury market as the market has a tired feel about it. There are several reasons for this lethargy. First, the market has already had quite a run and needs to consolidate its gains. The 2 year note is trading at the moment in the mid 140s. I subscribe to the belief that the next move from the FOMC will be at least to a 1 ½ funds rate. With 1 ½ percent as the funding anchor, the 2 year note is likely to be locked in a 1.40 percent to 1.60 percent range. Against that background there is little room for price appreciation.

The Federal Reserve action today socialized the risk in the short term funding market. That is another enormous extension of the Fed’s sway in the marketplace and at the margin should lessen the love affair with risk averse assets.

Supply. All of this stuff needs funding and that means significantly more supply than anyone would ever have guessed.

Ben Bernanke spoke today and chimed in on the economy. He did not pull any punches. He noted that the economy was weak even before this most recent round of financial turmoil. He took notice of the weak labor market and the fall off in consumption. He spoke ominously of a decline in business investment and suggested that the economic soft patch would last longer than anyone would have thought earlier.

He advertised an upcoming rate cut with his assertion that the downside risks to growth has increased and that the inflation outlook is somewhat improved.

I will cast my vote for a 50 basis point rate cut at the next meeting.

As I write this, I notice that stocks have finished at the lows of the day. I suspect that the Bernanke outlook helped to push them lower.

There is some real carnage in the financial sector. Morgan Stanley (MS) is down about 25 percent and Bank of America (BAC) has dropped 26 percent. There was a rumor early in the day that the Morgan Stanley /Mitsubishi marriage of convenience would not come to fruition. That rumor was denied by Morgan Stanley (MS) but does not seem to have stopped the bleeding.

The yield on the 2 year note has climbed 2 basis points to 1.45 percent. The yield on the 5 year note edged higher by 2 basis points, also and it yields 2.46 percent. The yield on the benchmark 10 year note and the yield on the Long Bond increased in each case by 5 basis points to 3.50 percent and 4.02 percent, respectively.

The 2 year/10 year spread increased 3 basis points to 205 basis points.

Finally, The Federal Reserve reported that consumer credit contracted by nearly $8 billion in August. It is the largest decline since record keeping of this data began in 1943. How do you say crunch?

Comments

[longtermstocks:]

"Consumer credit contracted by nearly $8 billion in August. It is the largest decline since record keeping of this data began in 1943."

Hold on tight, this is going to be a tough ride!

2008 Oct 07 05:42 PM

[GKM:]

What a shocker? People don't believe what is coming out of a banker's mouth? I'm trying real harder to remember the last one that wasn't issuing baldfaced lies but verily I can't.

2008 Oct 07 07:09 PM

[whidbey:]

Good review. I am a little concerned that the Fed may use all of its bullets before the consumer is aroused to spend. In short, caught without visible means of effecting policy.

The treasury bonds are also presenting problems since they will grow in quantity over time and be forced up in yield. Will the depressed economy off-set the growth in money supply? Not likely but what is the bias?

2008 Oct 07 07:11 PM