Bond Expert: Tuesday Outlook

Includes: BIL, IEF, IEI, SHY
by: John Jansen

Prices of Treasury coupon securities have climbed higher in overnight trading as credit fears and a variety of economic factors drove investors to the safety of bonds.The litany of troubles which investors will face as they confront the new trading day in the US is lengthy. Stocks around the globe have slumped as credit fears grip investors. In Japan stocks slumped as banks enumerated their exposure to FNMA (FNM) and Freddie Mac (FRE). I do not quite see why there is concern as the proclamation of Mr Paulson Sunday evening made that linkage more explicit than it has been ever been. Notwithstanding that observation, the Nikkei had declined about 2.0 percent.

In Hong Kong stocks fell nearly 4 percent as concern about the US financial system dominated trading.

In Europe the news is not any better. The German Dax had declined to a 21 month low and the ZEW measure of business sentiment plummeted more than expected to an all time low at -62.

In the UK the economic data sent stocks to their lowest level since 2005. House prices fell again in June and mortgage approvals reached the lowest levels in 9 years. Retail sales fell 0.4 percent in June and an official at a UK retail association described the environment as the worst since the 1970s.

UK inflation reached its highest level since the current record keeping system began in 1997 as YOY inflation was 3.7 percent in June. The official target is 2.0 percent.

In France the Bank of France reported that business confidence fell to a 5-year low as industrial activity receded and the retail sector flat lined.

In a final bit of gloomy news the Euro breached the $1.60 level and sterling traded above $2 as concerns about the fragile US financial system swamp the tsunami of sour economic data in Europe. The yen is flirting with 104.

Oil is above $146 and gold is driving towards $1000.

Futures trading at the current time indicated that US stocks will open with the Dow well below 11,000.

I have been writing this morning recap here for a little over 6 months and for many years as a market participant before that, and I do not recall ever having recorded as much negative news as I have recorded here this morning.

In that regard, I am surprised that bond prices are not higher than they are, though the steepening yield curve reflects the unraveling of confidence and fear which grips investors.

The yield on the benchmark 2 year note has slipped 5 basis points to 2.40 percent. The yield on the benchmark 5 year note has dropped 5 basis points to 3.12 percent. The yield on the 10 year note has dropped 2 basis points to 3.83 percent and the yield on the Long bond has lagged as it has decline just one basis point to 4.44 percent.

The 2year/10 year spread steepened 3 basis points to 143 basis points.

Traders today will need to be multi focused. There is quite a bit of data which will provide the economic backdrop. However, I think the raw numbers will pale before the testimony of Chairman Bernanke as he provides his semi annual (Humphrey Hawkins for the old-timers) economic review to the Congress.

Since the FOMC convened at he end of June there has been a seismic shift in financial conditions. The crisis of confidence which afflicts the GSEs as well as the new prominence of the feeble state of the regional banks are significant factors which the Committee did not have to deal with in its discussion.

I think that Mr Bernanke will be very dovish. In a more normal time I think he would forcefully advocate rate cuts. These are not normal times.

The system is poised on the precipice of disaster and I think that a fellow who cut his academic spurs writing about the Great Depression will look to avoid verbal miscues which would create any more turmoil.

That would seem like enough for now.

Weak open for credit

Early indications are that credit is opening very weak. The IG 10 had seen consistent support at the 140 level. Not so anymore as a recent quote pegs it 146.25 /147.25Wachovia Bank is indicated 25 wider and banks and brokers generically are 10 to 20 wider.