Prices of Treasury coupon securities are posting small mixed changes on overseas trading. The yield on the 2 year note has slipped 3 basis points to 0.95 percent.The yield on the 3 year note is unchanged at 1.48 percent. The yield on the 5 year note has declined 1 basis point to 2.41 percent. The yield on the 10 year note is unchanged at 3.50 percent and the yield on the Long Bond has climbed a basis point to 4.33 percent.
The 2 year/10 year spread is 3 basis points wider at 255 basis points.
The 2 year/5 year /30 year butterfly is 46 basis points.
Equity markets around the globe are weak as the shock of the labor data from Friday percolates and reverberates through global financial markets. Early indications are that there will be no bounce in the US as markets here will open with about one percent losses.
The focus of the day and week will be supply from the US Treasury.The auctions begin today with the sale by the Treasury of $ 8 billion 10 year TIPS.
As I write the breakeven inflation rate is 1.64 percent. That has cheapened dramatically over the last month as it had traded as wide as 205 basis points in June when the market was at its low. The whiff of wage stagnation/deflation in the jobs report will certainly not add to demand for TIPS.
There is one noteworthy piece of economic data today and that is the non manufacturing ISM. The consensus expects an increase to 46 from 44 in May. For some perspective it averaged 40.7 in Q4 and 41.8 in Q1.
More on Dollar Decline
Here is another
Bloomberg story on the beginning of the demise of the dollar. In this one Chins companies are settling international trade transactions in yuan.
I had posted a story over the holiday weekend regarding sated appetites for the once mighty greenback.
I am generally not an alarmist nor a conspiracy theorist but the realist in me says that there is so much anti dollar as reserve currency afoot here that the odds rise for a weak dollar driven debacle.
Large holders of the dollar could precipitate a crisis by simply announcing that they are not adding to current holdings of Treasury coupon securities. Suppose the Chinese announced that they were still fully enamored of their current dollar holdings but that they would not add any additional Treasuries to the mix and that all interest received on current holdings would be plowed into the bill market.
At some point the appetite of the large foreign holders will be sated. It is difficult to believe that might happen but most of what has transpired the last two years was always improbable. The last two years in the financial markets have been a cathartic exercise in purging excess. Maybe the last bubble and last excess is the US dollar. We have lived beyond our means for quite some time and enjoyed the benefit of trafficking in the global reserve currency which has made our life style possible.
If the dollar loses its acceptance as a reserve currency there will be a quick and severe retribution for our fiscal transgressions. I rarely agree with Larry Kudlow but he has a great line as he refers to it as “fiscal nymphomania”.
It would be a swift and ugly recompense with a repricing of all dollar based assets.
