Bond Market Opening May 11 2009

May 11th, 2009 7:27 am | by John Jansen |

Prices of Treasury coupon securities are surging in overnight trading with yields on benchmark paper declining between 4 basis points and 5 basis points. There is no major economic event which motivates the price gains and I would surmise it is mostly the result of the salutary effects of the end of the recent Treasury supply cycle.

For awhile the Treasury will be absent from the coupon market and during that period the Federal Reserve will be busy buying so the supply/demand technicals will clean up.

The one notable bit of news is some weakness in the equity markets overnight. Japan posted a small gain but the Hang Seng dropped 1.7 percent and most European exchanges have posted declines of around 1 percent thus far.

Trading in the futures market indicates that US exchanges will open with sharp losses following the recent spate of gains. There is no news ( at least I do not see any) but Bloomberg reports slumping commodity prices and s some fear that the recent gains in equity prices are a case of too far and too fast.

I still do not see the green shoots in the labor data from Friday. With revisions to prior months and adjustments for the addition of the census workers, the net loss was once again close to -700 K.

In order for the unemployment rate to stabilize the economy needs job growth in the neighborhood of 150K to account for the new workers entering the work force each month. We are light years away from reaching that level.

Without a healthy labor market there can be no growth in income and without that support consumption will languish. With home prices decimated and consumers’ faith in the resiliency of their 401Ks shattered consumption will compete with savings for cash as consumers repair their finances.  The savings rate is now 4 percent and some analysts see it pushing towards 7 percent and 8 percent.

That is a significant amount of sacrificed consumption which translates into slower labor market recovery and slower profit growth for business.

Business investment should also lag in the upcoming periods. One of the more interesting pieces of data which will be published later this week is capacity utilization. That series is a record lows and indicates a surfeit of excess capacity in the system. If one believes that ( and I have no reason to disbelieve) then from what source will business investment spring.

I am an armchair economist only but an awful lot of that excess capacity will need to be employed before business investment can stage a robust recovery.

My base premise is that after 25 years of economic growth in which economic growth was around 3 percent, I think we are about to enter a period in which growth is closer to 2 percent. I will check the 3 percent average. That is a guess from the vantage point of my “armchair”. But my point is that we will retrench and experience slower growth in the years ahead.

I also believe that there is a 1000 pound gorilla in the room in the form of future tax increases. Given the deficit forecasts of the Administration and the activist agenda on which they have embarked it is inconceivable to me that the Administration will not reqeust a tax hike sometime in the future. And I mean a healthy tax hike which reaches down into the middle class to raise revenue.

The markets will reject the predicted future deficits and demand action and I think that action (the only action possible) is higher tax rates. That will happen at the beginning of President Obama’s second term!

The yield on the 2 year note has declined 4 basis points to 0.94 percent. The yield on the 3 year note has slipped 5 basis points to 1.40 percent. Te yield on the 5 year note has declined 5 basis points to 2.08 percent. The yield on the 10 year note has dropped 5 basis points to 3.24 percent. The yield on the 30 year bond is 4.22 percent.

The 10 year/30 year spread is still very wide at 98 basis points. On the morning of the 10 year note auction the spread was 90 basis points. if you are bullish look for that spread to grind tighter.

The market has staged a nice recovery from the supply related lows of Thursday and Friday. Here are a couple of key levels to watch.

On the 10 year note the auction average was 3.19 percent. That is a natural level to expect resistance.

On the 30 year bond the issue was trading in the vicinity of 4.19 percent at the moment of the auction on Thursday. That level should provide some resistance as when it is reached the market will have erased the auction concession.

I run on. Have a great day.


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  1. 6 Responses to “Bond Market Opening May 11 2009”

  2. By BL on May 11, 2009 | Reply

    I don’t necessarily disagree about the taxes, and I’m even shifting to Roth accounts rather than plain 401K for now, but there are some possible mitigations.

    Lots of fat to be trimmed from health care, much of which is being paid for by gov’t.

    Much of TARP etc will get paid back, with interest. This is already happening.

    Some of the current spending is really smart investing, such as the weatherization program, and research on energy, medicine, etc.


  3. By MFL on May 11, 2009 | Reply

    Your thoughts on the economics outlook are very much appreciated.

  4. By Ron Piazza on May 11, 2009 | Reply

    Another positive for treasuies: seasonal strength. We typically see this phenomenon after the May refunding. Which will win out? seasonal strength or the 500B+ in securities the treasury will bring to market between now and Sept?

  5. By Dave on May 11, 2009 | Reply

    BL don’t be surprised to see the gov dip into regular as well as Roth IRA’s sometime in the next 20 years. We as a nation really are broke.

  6. By Andrew on May 11, 2009 | Reply

    BL must be living in delusional land…. tarp being paid back? hahaha have you seen the details of the chrysler bankruptcy where the UAW gets 55%?? Just close you’re eyes like everyone else in this country and tap you’re red shoes together and pray and hope to go home. Its only going to get worse.

  7. By franko on May 11, 2009 | Reply

    saw quote of Prof Case (of Case-Shiller fame) that each unemployed person represents 180 sq feet of vacancy within commercial real estate world – so link those two datasets, and it’s not cool for banks either in creditcards (from unemployment) or for loan performance/growth in CRE world – carry on

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