Some Opening Comments May 30 2008

May 30th, 2008 5:35 am | by John Jansen |

Prices of Treasury coupon securities have continued their rebound which began with the conclusion of the 5 year note auction yesterday afternoon. That auction resulted in a yield of 3.52 percent for that issue and was 2 ½ basis points cheaper than levels which prevailed in cash market trading at auction time. The issue lacked sponsorship, it seems. In overnight trading the issue is now 3 basis points lower than it was when New York trading concluded yesterday and yields 3.40 percent. Other benchmark Treasury issue have also maintained a robust tone. The yield on the benchmark 2 year note has slipped 4 basis points to 2.64 percent. The yield on the 10 year note has also dropped by 4 basis points and rests at 4.04 percent while the yield on the Long Bond has declined by just 2 basis points to 4.73 percent.As I have noted recently (ad nauseam) the market has tended to move in the direction of the last big trade. Treasury supply this week was the big trade and the price action gives testimony to the volatility and nearly one way price movement which accompanied those sales. With those auctions completed the market turned its attention to the month end index extension trade which will take place today. That forced buying by those who have a mandate to maintain certain duration will give the market a bid throughout the day.

Economic data released overnight on the state of the economies of some of our major trading partners might also motivate some purchases. Consumer confidence in the UK fell to its lowest level since 1990. German retail sales dropped for the second month in a row. Swedish GDP posted its slowest growth in 4 years. Japanese household spending registered its largest decline in 19 months and the jobless rate in that country is at a 7 month high.

The US market braces for a round of economic data today. The closely followed core PCE should be tame and spending adjusted for inflation should be on the weak side. The University of Michigan will provide the final cut of its Consumer Confidence report for May and it is likely to remain at 30 year lows. Finally, economists expect the Chicago Purchasing Mangers survey to hover just below the 50 level.

I forgot to mention oil which has been the flavor of the day lately. The last time I checked it was trading with a $125 handle so there has been no rebound from the outsized losses of yesterday. The litany of economic weakness I cited earlier should ignite some level of caution amongst traders in that market. There have been several stories out this week about receding demand and I think that it is fair to say that the low hanging fruit has been picked in that market.

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