Bond Expert: Tuesday Outlook

by: John Jansen

Prices of Treasury coupon securities have staged a rather dramatic retreat in overseas trading and the longest maturities have taken the worst drubbing. In fact, I have not been able to locate a single solid reason for the rout but I surmise that the continued nationalization of the global banking system brings with it the specter of grander issuance by governments to prop up the failing institutions.

The yield on the 2 year note has climbed 3 basis points to 0.75 percent. The yield on the 3 year note has increased by 3 basis points to 1.09 percent. The yield on the 5 year note has jumped 7 basis points to 1.54 percent.

The situation gets messier in the longer maturities. The 10 year note has fallen a point in price and its yield has surged 11 basis points to 2.43 percent. The dollar price of the Long Bond has tumbled 3 points and its yield has climbed 16 basis points to 3.03 percent.

The 2 year/10 year yield spread has widened 8 basis points to 158 basis points.

As the market tumbles, the belly of the curve lags the wings. The 2 year/5 year/30 year butterfly which traded at 90 basis points last week has retreated to 68 basis points this morning.

Global equity markets are falling and bank stocks are taking an additional drubbing. Financial markets apparently are not giving President Obama much of a honeymoon.

In New Zealand consumer prices fell 0.5 percent in Q4 from Q3. Year over year prices rose 3.4 percent. The base rate in New Zealand has been slashed to 5 percent from 8.25 percent in July and analysts anticipate another 1 percent cut at the meeting at the end of January.

In China official statistics show the urban unemployment has climbed to 4.2 percent at year end. The government has announced that it expects this official rate to creep up to 4.6 percent. That would put it at its highest level since 1980.

Bloomberg news notes that there are other labor market data in China and they manifest an even weaker labor market.

Household spending in Japan fell 0.9 percent in November as the global recession deepened. Against that background, Mitsui Mining and Manufacturing announced that it would slash its workforce 20 percent by cutting 4000 jobs.

The dollar is firmer against the major currencies as well as against the emerging market currencies as risk aversion increases.

Front month oil has tumbled below $35.

Libor US$ Fixing 1/20 1/19 Change
OVERNIGHT 0.14125 0.13625 0.00500
1 WEEK 0.24250 0.24188 0.00062
2 WEEKS 0.28313 0.28625 -0.00312
1 MONTH 0.35250 0.35500 -0.00250
2 MONTH 0.86125 0.87375 -0.01250
3 MONTH 1.12250 1.13250 -0.01000
4 MONTH 1.29125 1.29750 -0.00625
5 MONTH 1.42625 1.43250 -0.00625
6 MONTH 1.54500 1.55625 -0.01125
9 MONTH 1.70875 1.72375 -0.01500
12 MONTH 1.83000 1.85125 -0.02125

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