Market Analysis

Both bonds and stocks are up slightly this morning.  The bond market continues to benefit from the "flight to safety" trade as those investors who are existing the stock market are tolerating lower yields in return for the perceived safety of Treasury Notes.  It is interesting to note that Treasury notes are "safe" if you hold them for the duration and are willing to accept the yield (currently just under 3.2%) during that term.  However, for those who are only temporarily "parking" money in Treasuries, they can lose value.  With the Federal Reserve ending its buyback program of Treasury Notes this month and winding down its mortgage-backed security (MBS) buyback program (last week the Federal Reserve reported that they had used approx $905 billion of the $1.25 trillion MBS buyback funds), it is a risky proposition to assume that rates will stay this low much longer. 

Below is a recap of the economic calendar for this week.  The economic calendar is light. As such, the results of this week's Treasury auctions and the performance of the stock market will most dictate the direction of interest rates.

Monday, Oct 5

September Institute of Supply Management (ISM) Service Sector Index - index came in at 50.9, which was better than the 50.0 analysts had been projecting.  A value over 50 implies expansion and a value under 50 implies contraction.

Treasury Dept sells $7 billion of inflation indexed notes

Tuesday, Oct 6

Treasury Dept sells $39 billion of 3 year notes

Wednesday, Oct 7

Mortgage Banker's Association Purchase Applications Index - this is a weekly index that tracks purchase applications.  Analysts watch this data for signs of the direction of the housing market.

Treasury Dept sell $20 billion of 10 year notes

August Consumer Credit - The amount of consumer credit outstanding has been declining in year over year comparisons since February.  The August reading is expected to show abatement of this decline but it is expected to be primarily due to the cash-for-clunkers program.

 Thursday, Oct 7

Initial Jobless Claims Week Ended 10/3 - this report last week triggered a decline in the stock market as the employment picture improving is considered critical for an early-stage recovery to migrate towards a full blown recovery.  Analysts are expecting jobless claims to be up by 11,000 this week.

August Wholesale Trade - analysts are expecting that inventories at the wholesale level continued to decline in August.

Treasury Dept sells $12 billion of 30 year bonds 

Friday, Oct 8

August International Trade - the US trade gap is expected to have increased in August to $33 billion from a $32 billion gap in July and a $27.5 billion gap in June.  Our trade deficits had been running in the low-to-mid $60 billion per month level from 2006 until October of 2008.  The US trade deficit has been running in the high $20 billion to low $30 billion level since February of this year as US consumers significantly curtailed their purchases of both foreign and US goods.   One of the reasons foreign investors, and particulary the governments of China and Japan, continue to buy our Treasury bills, notes and bonds is to try support low rates to jump start our economy back in hopes that US Consumers will again be purchasing their goods at levels that far exceed the amount of our goods purchased by their countries.  At some point, if it appears that US consumers have made a fundamental change in our buying habits, domestic pressure will grow for these governments to curtail  their purchase activity of US Treasury notes.  Given that much of the debt issued by the Treasury Dept is short term in nature (5 years or less maturity) it will be very interesting to watch the relationship of trade balance, foreign purchases of US debt and interest rates over the next several years, particularly given that the current forecast is for the US to run an additional $9 trillion defcit over the next 10 years.  This means that in addition to selling $9 trillion in new debt over the next 10 years we will be needing to refinance the trillions of short term debt that is maturing in the next couple of years and almost the entire approx $12 trillion of national debt over the same decade given that very little of the debt is in the form of 30 year bonds.