The Treasury market managed to make it 2 positive weeks in a row even in the face of a stronger stock market.

Last week it was Fannie Mae and Freddie Mac’s turn to report losses that were out of this galaxy. Both of those stocks are now trading comfortably under $10 per share, but the Administration still maintains that there is no bailout necessary to save these mortgage behemoths. Credit spreads remain under pressure and liquidity is not improving. The Wall/Bay street analyst community is slow to react but the torrent of downgrades keep poring in as a result. On-going problems on this front are likely to support the bond market.

The Treasury conducted a couple of quarterly refunding auctions: 10 year notes on Wednesday and 30 year bonds on Thursday. The auctions were both very well received by both domestic and international investors. As a matter of fact, the 10 year Note was so aggressively bought that the bond market rallied strongly into the 30 year auction. The other event of some significance was the FOMC policy meeting last Tuesday. As expected, the Fed left its overnight rate unchanged at 2%. As per my previous comments, I am standing by my forecast that the Fed is months if not years away from changing the Fed Funds rate and when they do, they will be more likely lowering - not raising rates as the consensus would have you believe at this point. In addition to the Fed meeting, a couple of European Central Banks held policy meetings as well on Thursday. Both the ECB and the Bank of England acknowledged that the European economies have slowed considerably and they have no immediate plans to raise rates at this point. The US Dollar had its best week in years in reaction to the dovish chatter from Europe’s leading central bankers. Add to the pile the weak economic reports coming out of even countries that have resource based economies such as Canada and one gets a picture of a significant slowdown not only in the USA but also across the rest of the globe. As a result a number of bond markets are now discounting further Central Bank rate reductions. In Canada for instance, the Central Bank Rate is 3%, but the 2 Year Bond Yield last traded at 2.72%, indicating that in the bond trader’s opinion the Bank of Canada rate is artificially high and it should be lowered sooner than later in spite of the concerns expressed about inflationary pressures after the last couple of BOC meetings.