Bond Expert: Monday Outlook

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Includes: IEF, IEI, PLW, SHY, TLH, TLT
by: John Jansen

Prices of Treasury coupon securities are engaged in one of their periodic ghoulish surges as the global outbreak of swine flu has motivated buying of government bonds. European equity markets are down sharply and indications in the futures market are that the US market will open sharply lower.

Travel related stocks are taking a beating on the assumption that the outbreak of the disease will curb travel. Health care companies are surging.

Treasury bond prices are rebounding from the price declines which they suffered on Friday. This is another indication that one should not be short at the back end of the range.

The yield on the 2 year note has declined 4 basis points to 0.92 percent. The yield on the 3 year note dropped 5 basis points to 1.32 percent. The yield on the 5 year note decreased by 5 basis to 1.88 percent. Five basis points is a magic level as the yields on the 10 year note and the 30 year bond declined by that amount also to 2.94 percent and 3.84 percent, respectively.

The 2 year/10 year spread is a tad flatter at 202 basis points.

The 2 year/5 year/30 year spread is 100 basis points. I believe I closed it around 300PM Friday at 95 basis points which indicated that the 5 year note has improved 5 basis points vis a vis the wings of the curve.

Today is a light data day with only second tier data available for perusal. Economists note that today will feature the release of the Homeowner Vacancy report. That report tracks owned homes which are vacant and for sale. The rate was 2.9 percent in Q4. The UBS economists think that housing starts have slowed sufficiently that this metric will post a decline.

The Dallas Federal Reserve and the Chicago Federal Reserve release their manufacturing surveys today. These are not widely followed but given that much of the discussion about green shoots centers on stabilization in manufacturing, these series from the regional Federal Reserve Banks may receive greater than normal scrutiny.

Today may be a day for second tier data but the remainder of the week is replete with data points.

Wednesday will bring a first view of Q1 growth. I think the consensus is for contraction of around 4.5 percent. Those who are bullish on the economy will note that inventory liquidation is responsible for a large chunk of that decline and that very decline is sowing the seeds of future recovery.

The FOMC meets and will disclose the results of its deliberations on Wednesday. I think the Committee will be slightly more upbeat and take note of stability and nascent signs of recovery. They will reiterate the fragile nature of the global economy and they will express concern about inflation being too low. I think they will also reiterate that the funds rate will remain low for an extended period.

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