Across the Curve

Opening Comments January 15 2009

Prices of Treasury coupon securities maintain a robust tone as economic reports continue to manifest weakness and credit concerns are unabated. Market participants brace for a round of data today in the US which could portend a fresh round of softening.The flattening of the yield curve evident yesterday is once again the rule in overnight trading as the yield on the 2 year note remains unchanged at 0.71 percent. The yield on the 3 year note slipped 2 basis points to 1.01 percent. The yield on the 5 year note dropped 3 basis points to 1.33 percent. The yield on the benchmark 10 year note edged lower by 54 basis points to 2.16 percent. The yield on the 30 year bond dropped 4 basis points to a parsimonious 2.85 percent.

The 2year /10 year spread narrowed 4 basis points to 145 basis points.

The 2year/5 year/30 year spread is 90 basis points as the 5 year note outperforms the wings of the butterfly.

In South Africa manufacturing slumped for the 8th consecutive month in December as the global recession ate into that county’s exports. The PMI stood at 40.1 versus 39.5 in November. A reading below 50 represents contraction and the November reading was the first below 40 since 1999.

In Australia the jobless rate rose to a 2 year high of 4.5 percent in December from 4.4 percent in November.

Mitsubishi UFJ will record losses on investments and take a $3.2 charge. I believe that Mitsubishi is a chunky investor in iconic American firm Morgan Stanley.

Nissan will cut production of autos in February and March at an annual rate of 64K.

Machinery orders in Japan fell a record 16.2 percent in November. It was the largest decline for this series since its inception in 1987 and indicates that cap ex spending will not provide the economy a burst of energy.

European inflation fell to 1.6 percent in December from 2.1 percent in November. That is the lowest rate since October 2006.

US investors will have plenty of data to absorb and assimilate today. PPI , the monthly Empire survey of manufacturing in the New York region, the Philadelphia Fed manufacturing index and the weekly claims data will give a fresh look at the economy.

I expect the bond market to remain well bid and expect the 10 year note to test the 2.00 percent level. In the interest of full disclosure I hold a reasonable position in the IEF. I bought some during the auction process when the 10 year traded near 2.50 percent and I added to the position yesterday with 10 year at 2.21 percent.