Bond Expert: Thursday Outlook

by: John Jansen

Prices of Treasury coupon securities are posting mixed results in overnight trading as various markets react to the FOMC statement yesterday. The jury seems to be delivering a verdict that the FOMC has spoken strongly but has failed to carry a big stick. Against that background the yield curve has steepened overnight as investor concern deepens about the resolve of this Fed to fight inflation.The yield on the benchmark 2 year note is unchanged at 2.82 percent. The yield on the 5 year note has climbed 1 basis point to 3.54 percent. The yield on the benchmark 10 year note is higher by 2 basis points and rests at 4.12 percent. The yield on the Long Bond has increased by 3 basis points and is now 4.68 percent.

The 2 year/10 year spread has steepened by 2 basis points to 130 basis points. I am not a pure chartist but memory tells me that 130 basis points is a significant level for that spread. That was a support level when the spread traded broadly between 130 basis points and 160 basis points. So if the spread were to sustain trading above the 130 basis point level it would be a strong signal that more curve steepening is in store.

The Treasury will test the investment waters today when it auctions $20bilion 5 year notes.

Federal Reserve Board member Kohn spoke to an ECB research forum and noted that the “high headline rates of inflation have shown only a few tentative signs of embedding themselves in core inflation or in longer term inflation expectations.

In that regard the 10 year TIPS breakeven rate is at 251 basis points. That is at the higher end of the range but it remains anchored in the range and refuses to break out.

There is a little financial distress overnight. Goldman Sachs added Citibank to its conviction sell list and the stock is “listing” overnight. I guess we can be glad that the folks at Goldman have the courage of their convictions but it seems as though they have missed the first 40 points or so on this one.

Additionally, Belgian financial giant Fortis revived financial fears as it cobbled together various measures to raise about $12 billion. The company will issue some stock, cancel a dividend and pay another dividend in stock.
In foreign exchange the dollar made a two week low versus the Euro and the Euro touched an all time high versus yen.

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