Bond Expert: Monday Outlook

by: John Jansen

Prices of Treasury coupon securities have slumped again in overseas trading as the specter of government bond supply becomes harsh reality this week.

This week the Treasury will seek buyers for 20 year TIPS, 5 year notes and 2 year notes. Sandwiched in between the heavy round of financing will be the announcement by the FOMC regarding its policy stance at the conclusion of its policy-making meeting this week.

The yield on the 2 year note has climbed 4 basis points to 0.85 percent. The yield on the 3 year note has also climbed 4 basis points and rests at 1.19 percent. Four basis points is the magic number overnight as the yield on the 5 year note edged higher by that amount to 1.67 percent. The 10 year note bucked the trend and its yield increased just 2 basis points to 2.64 percent. The yield on the 30 year bond conformed to the trend of most of the other bellwether bonds and its yield rose 4 basis points to 3.36 percent.

IG 11 is opening two tighter at 204/207

Economic news overnight reinforces the notion that the global economy and the global financial system are in a very fragile state. As an example, credit card use in New Zealand plunged again in December. Spending fell 2.2 percent in the most recent reporting period after slipping 1 percent in the prior period. Bloomberg notes that this series is in its worst slump since the advent of record keeping on this topic in 1994. There was additional evidence of economic weakness in New Zealand as the service sector contracted for the ninth consecutive month. The service sector index registered 48.0 versus 47 in the previous period. Readings below 50 indicate contraction.

In Japan the stock market slumped to a three-month low and a 20-year bond auction this week weighed on sentiment. The Finance Minister of China cited challenging global markets and noted that it would be very difficult for China to balance its budget this year. Phillips Electronics announced that it lost nearly $2 billion and also said it would lay off 7000 workers. What is good for labor is good for capital and the company also announced that it would no longer buy back its own shares.

European banking giant BNP (BNP) announced that it had a nearly $2 billion loss in Q4. ING (NYSE:ING) announced that it faces a 2008 loss of 1 billion Euros and wishes to become a ward of the state as it willl seek government assistance and guarantees. UK home prices fell 9.4 percent YOY in January.

The British pound is showing some improvement today though it is hard to say if it is doing anything other than an imitation of a moribund feline striking the pavement. Barclays (NYSE:BCS) has announced it will show some profit in 2008 and that it would not have need to raise new capital. The government has also made some efforts to ease fears of imminent nationalization which arose last week.

The 5 day moving average is $1.3923 and one analyst viewed that level as a likely resistance point.

One dealer who puts out a regular morning piece but from which I do not have permission to quote directly notes that purchases of US assets from Japan have diminished of late. The writer noted that the observation was purely attributable to the anecdotal evidence at his firm. He also noted recent MoF data but did not elaborate. The author also noted that low oil prices have curtailed investments from the oil patch and recent comments from Treasury Secretary-designate and personal tax strategist Geithner have probably dimmed enthusiasm for US debt from that quarter. I just think that the observations are very interesting, and especially so at a time when the US Treasury will break the land speed record for issuance.