Prices of Treasury coupon securities have slipped marginally in overseas trading of US government securities. The yield on the 2 year note has increased by about 2 basis points to 1.66 percent. Each of the other benchmark Treasury securities has seen its yield rise by just 1 basis point.That leaves the yield on the 5 year note at 2.51 percent,with the benchmark 10 year note at 3.45 percent ,and the Long Bond trading at 4.33 percent.The yield differential between the 2 year note and the 10 year note has narrowed by 1 basis point to 179 basis points.
Equity markets around the globe are manifesting weakness as the sun races westward. In Asia the Nikkei and the Hang Seng Index each posted declines in the neighborhood of 2 percent. European equity markets are showing a wide range of losses ranging from just .1 percent in the Netherlands to more than 1.5 percent in Spain. Futures markets posit that the US markets will open about unchanged from Friday’s less than festive close.
Equity market weakness in Europe derives from concerns about bank profitability as Merrill Lynch panned Credit Suise and a newspaper report suggested that UBS would need large infusions of capital.Seprately,telecom shares wilted as Morgan Stanley slammed Vodafone.
Shares in Japanes firms fell in Tokyo as traders anticipated that a spate of reprts in the US this week as well as the release of the Tankan survey tomorrow would indicate that the global economy remans in a tenuous state with no improvement in sight.
Bond markets face the same data and I think that the US fixed income markets will grind to higher prices and lower yields this week. This week the market braces for the employment report on Friday as well as the Chicago Purchasing Managers Survey today and the ISM survey tomorrow. Recent economic data paint a gloomy picture with confidence surveys falling to multi year lows and jobless claims filings near cycle highs. The consumer has grown weary and stingy and the profit warning from JCPenney last weeks places the parlous state of middle America in the spotlight. Durable Goods reports point to slowing business investment and the best that one can say about recent housing market indicators is that they might be registering a bottom but still confront the overhang and pressure of heavy inventories.
Against that background, I think that the best trading posture is to anticipate additional weakness in the manufacturing surveys as well as deep employment cuts by businesses reaching for profits to register in the labor report on Friday. If the week unfolds in that manner,the bond market should mount one more assault on the 3.30 level on the 10year note which has proved to be resitance on two prior visits there this year.
In the interest of full disclosure I own a modest amount of the ETF IEF which tracks the 7year/10 year portion of the US Treasury market.
Have a great day.