Weak US Data sends Treasury Yields to Record Lows, back up ahead of FOMC meeting.

These last two weeks have been depressing, but I will do my best to update more. It's just that my outlook has come true, but not for the best. I've long sounded the alarm here that the US is not recovering at a desirable pace for investors, consumers, and government. Jobless numbers fell slightly, and non farm payrolls came in less than expected. The labor market is pretty much stagnate, leaving many fearing that it can either go up or down from here - other economic data weighing heavily on the latter. Durable goods orders slid 1% as Dow Jones Newswire predicted a 1.1% gain; further evidence of a weakening manufacturing sector.

Treasuries rallied from this data sending yields to record lows (see UST2yr -10yr chart, source: MarketWatch). Even though foreign demand for US treasuries decreased, for the first time since August 2007, US investors own more treasuries than foreign holders. This is not looking good. The Fed will auction off $74 billion of 3-10-and 30 year securities starting tomorrow. The continuous decline of US treasury swap spreads show decreased demand, which may hurt the Fed's auction. Either way, the sale of notes sparks market anticipation that the Fed might announce further monetary stimulation in response to weak economic data through quantitative easing. This sent 2-year Treasury bonds higher breaking out of record lows; 10-year remains steady as the market awaits tomorrow's FOMC meeting. At this point, I'd whisper to Bernanke "here we go again".

Fed Chairman Bernanke did state at a recent Congressional hearing that monetary stimulus withdraw will continue. I'm not certain that he will stick to his word. US consumers are not confident because the economy is not ready to support spending. Producers are not confident, certainly as manufacturing data weakens and CPI remains sluggish. People are saving more, and banks are not lending. Banks are using this glut of savings deposits and transferring that over to US treasuries. This is nothing new. At the start of the crisis, just when banks received bail out funds to stay afloat, much of this cash was sent right back to the Treasury increasing the demand for bonds - decreasing yields, increasing prices. The Fed stepped up with quantitative easing to crowd out the treasury market so that banks can turn towards lending, but the economy does not support the consumer, leaving bankers skeptic about lending to risky borrowers. The Fed can beef up its portfolio by purchasing treasury bonds, but don't let this discourage you from paying attention to the economic perils that bankers are set to face.

At the moment of this publication, the San Francisco Fed stated that the chance of recession in the next two years is "significant" - reversal is unlikely in the next few months. Perhaps a warning that the Fed will revert back to more stimulus?

The US dollar is suffering severely since June 2010 against a basket of other currencies (see ICE US Dollar Index Chart); there is evidently no reversal from a long term (3 month-1 year) perspective, despite minor ticks from intra-day volatility. Investors should remain bearish on the dollar.

This will be a nail biting week as one of the most anticipated FOMC meetings is held tomorrow.