Prices of Treasury coupon securities have registered small mixed changes in overnight trading as the market consolidates the gains attained yesterday. Equity markets around the globe sold off as growth concerns and credit fears dominate trading.The yield on the benchmark 2 year note has slipped a basis point to 2.56 percent. The yield on the 5 year note is unchanged at 3.31 percent. The yield on the 10 year note has climbed a basis point to 4.01 percent and the yield on the Long Bond has climbed a basis point, too, to 4.61 percent.

The 2year /10 year spread is now 145 basis points

Most economic data released overnight has a decidedly weak flavor.

In an earlier posting I noted the rise in unemployment and the drop in household spending in Japan.

In New Zealand home building approvals slumped to a 22-year low.

In Australia, NAB had scheduled a bond sale to raise Aussie $850 million. The recent credit turmoil at Australian banks flummoxed investors and the bank was forced to reduce the size of the offering by 2/3.

In an even more ominous development Starbucks (SBUX) announced that it would close 61 of 84 Australian stores. That is truly a sign of economic malaise.

European economies have not been immune to bad news. Consumer confidence in France fell to -48 from -46. That was the lowest level recorded for that series since its inception in 1987. In another sign of economic strife housing starts plunged 28 percent from year ago levels.

In the UK, retail sales plunged to the lowest level for that series in the 25 years since record keeping began.

Equity markets around the globe slumped in response to the sharp declines in the US market and in response to credit fears generated by the Merrill Lynch write down. Investors are wondering when and where the next surprise will unfold.

European markets have declined between 1.0 and 1.5 percent. In the pacific region, the Nikkei, the Hang Seng and the Australian indices shed between 1.5 and 2.0percent.

The reaction of the markets to the Merrill Lynch (MER) news will dominate trading today in the US fixed income markets. The ongoing crisis in credit is nearing its one-year anniversary. The saga has been marked by a series of rolling crisis with constantly shifting targets. Some in the market will treat Merrill favorably and view the firm’s action as purgative and cathartic.

Others will seek new victims and new targets. I would busy myself today observing other financial sector names that might be targeted.

Separately, the credit debacle had it genesis in the housing market with the collapse in home prices. If the markets are to return to some stability the housing market will lead the way. Today the market will digest the Case Shiller home price index. If the pundits are correct, the way is still dark and that index should post additional declines indicating that Yogi Berra was right when he said,” It ain't over till its over.”

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John Jansen

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