Bond Expert: Tuesday Outlook

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Includes: IEF, IEI, SHV, SHY, TIP, TLH, TLT
by: John Jansen

Prices of Treasury coupon securities have slumped in overnight trading as the global flight to quality reverses itself. The market has pared some of its earlier losses and has modestly reversed some of the curve steepening observed yesterday.The yield on the 2 year note has climbed 4 basis points to 0.80 percent. The yield on the 3 year note has edged higher by 3 basis points to 1.08 percent. The yield on the 5 year note has climbed 1 basis point to 1.69 percent. The yield on the 10 year note has increased 2 basis points to 2.50 percent and the yield on the Long Bond has also moved higher by 2 basis points to 3.05 percent.

The 2 year/10 year spread has narrowed 2 basis points to 168 basis points.

Economic data released overnight continue to highlight global economic weakness.

In Australia the service sector index increased slightly to 39.3 in December. A reading below 50 indicates contraction and the index has been below 50 for nine consecutive months.

Bloomberg reports that the slump in global demand will take a heavy toll on the Indian economy. Companies in that important emerging market may slash as many as 10 million export related jobs this year as global demand craters. According to the story, 150 million people in India are employed in the export sector.

European inflation fell below the ECB target level of 2.0 in December as inflation slowed to an annual pace of 1.6 percent from 2.1 percent in the prior month.

UK home prices fell at an annual rate of nearly 16 percent in December.

The UK service sector PMI edged up to 40.2 in December from 40.1 November. Once again a reading below 50 is contraction and this is the 6th consecutive month below 50.

French consumer confidence fell to minus 44 from minus 43.

The US market faces an auction of $8 billion 10 year TIPS today. This is the first round of coupon supply in a supply heavy week. It will be interesting to gauge dealer risk appetites now that the calendar pages read 2009.

And at 2:00 PM the Federal Reserve will release the minutes of the last FOMC meeting. That was the watershed gathering at which the Committee reduced the funds rate to nearly zero and proclaimed that it would pay any price and bear any burden (that might be a nice phrase for the new President to incorporate into his inaugural address) to stabilize the economy. So the minutes should be a very interesting insight into the collective psyche of the attendees.