Bond Expert: Thursday Outlook

Prices of Treasury coupon securities have surged in overnight trading and the yield curve has  reversed its recent flattening trend as weak economic data has prompted a shift of funds into shorter maturity bonds. Economic data released in various venues overnight suggests pervasive global economic weakness.The yield on the benchmark 2 year note has dropped 6 basis points to 2.72 percent. The yield on the 5 year note has dropped 4 basis points to 3.45 percent. The yield on the benchmark 10 year note has declined 2 basis points to 4.09 percent and the yield on the Long Bond has dropped 1 basis point to 4.67 percent.

The 2 year/10 year spread has moved wider by 4 basis points to 137 basis points. That understates the move. The market has shifted to the new 2 year as the benchmark. So we are now using the July 2010 issue. The roll from June to July is about 5 basis points. The yield on the retired benchmark is about 5 basis points lower. If we were still comparing to that issue the spread would be 5 basis points wider at 142 basis points.

Yield curves in UK and Germany steepened even more dramatically than in the US. The 2 year/10 year spread in Germany has widened by 5 basis points led by a 12 basis point drop in the 2 year yield.

The 2 year/10 spread in the UK has widened 6 basis points led by a 10 basis point drop in the 2 year yield.

Global economic data released in the overnight session is supportive of a steeper yield curve.

In Germany the IFO Business Climate Index dropped to 97.5 in July from 101.3 in June. The consensus forecast was around 100.2.

The Eurozone composite PMI dropped to 47.8 in July from 49.3 in June. That is the lowest reading for that series since November 2001.

In the UK retail sales plunged 3.9 percent in June. It was the steepest decline for that series since record keeping began in 1986. (As an aside, I want a British reader to explain why they have only been keeping records since 1986. I want to believe it is a typo and records on retail sales have been compiled since 1886 and the reign of Queen Victoria.)

There is more gloomy news to peruse. Spanish unemployment hit a 3 year high at 10.4 percent.

Danish consumer confidence dropped to -9.7 in July from -6.6 in June.

To demonstrate than the economic weakness is pandemic and not Eurocentric I would be remiss if I did not report sliding exports in Japan and Hong Kong. Exports from Hong Kong to mainland China, Japan and the US declined for the first time in 2 years in June.

Japanese exports to the US dropped for the first time in over 4 years in June. Shipments of cars to the US dropped 14.2 percent.

I will not launch into one of my rants, but I do think that the evidence speaks for itself and even the casual economic observer will agree that higher rates are the wrong medicine for the ailment sof the global economy.

The US markets wait for data on initial jobless claims as well as Existing Home Sales today.

Some overnight flows:

Forward rollers in the 2 year.

Real money extending from 2 year sector to belly of the curve.

Specs buying Europe versus US

Central bank sellers of 5 years.