Bond Expert: Wednesday Outlook

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Prices of Treasury coupon securities have rebounded somewhat in overnight trading from the depressed levels attained yesterday. The yield on the 2 year note slipped 3 basis points to 0.93 percent. The yield on the 3 year note declined 4 basis points to 1.34 percent. The yield on the 5 year note edged lower by 4 basis points to 1.87 percent. The yield on the 10 year note fell 2 basis points to 2.86 percent. The yield on the Long Bond dropped 4 basis points to 3.64 percent.

The 2 year/ 10 year yield spread widened one basis point to 193 basis points. I noted yesterday that dealers anticipated that the forward roll into the new WI 10 year note when it is announced in a few hours will be around 6 basis points. That means that the 2year/10 year spread against the new issue will be flirting with the 200 basis point level and I suspect that level will draw some buyers as the process unfolds.

The refunding announcement and the details of any new financing activities which the gargantuan deficits have necessitated will be the most important news item of the day.

The market will also receive the ADP guess on job destruction in January and the ISM report on the service sector.

The process of repairing the banking system (read the nursery rhyme Humpty Dumpty) is proving to be a challenge for the Obama Administration. News reports indicate that the bad bank idea is losing followers and that the Administration seems to be turning to idea of massive guarantees of the flotsam and jetsam in bank portfolios.

Seychelles, an island chain in the Indian Ocean (which I believe I contacted when I was an active ham radio operator), recorded an inflation rate of 63.3 percent in December. (As an aside my best ham radio contact ever was with the Pitcairn Islands. That is the home of the descendants of the survivors of the Mutiny on the Bounty. It is a speck in the Pacific.)

Australian retail sales jumped 3.8 percent in December from November when the series had risen 0.4 percent. The strong result is a consequence of the government doling out stimulus money.

To pay for that effort the Australian Government will sell A$ 24 billion of bonds by June 30th. They will begin this Friday with the sale of A$ 600 million April 2015s.

Panasonic will slash 15,000 jobs as it confronts its first losses in 6 years.

Japanese airlines have requested financial aid from the government.

In China manufacturing slumped for the fourth month in a row but the PMI did rise to 45.3 from 41.2.

Munich Re had investment losses which reduced profits by 62 percent.

And in the UK the National Institute of Economic and Social Research (Orwell is smiling) predicts that the recession will linger until Q4.

IG 11 opening one better at 193/195.

Libor US$ Fixing 2/04 2/03 Change
OVERNIGHT 0.31875 0.31125 0.00750
1 WEEK 0.36250 0.35125 0.01125
2 WEEKS 0.40375 0.40125 0.00250
1 MONTH 0.44500 0.44500 0.00000
2 MONTH 0.95125 0.94875 0.00250
3 MONTH 1.23563 1.23375 0.00188
4 MONTH 1.45875 1.46000 -0.00125
5 MONTH 1.60000 1.60000 0.00000
6 MONTH 1.77375 1.77625 -0.00250
9 MONTH 1.93000 1.93500 -0.00500
12 MONTH 2.08875 2.08375 0.00500