Prices of Treasury coupon securities surged in overnight trading, partially reversing some of the huge declines suffered yesterday. As I review the overnight economic data there does not appear to be a single story which I can cite as the proximate cause for the rally. There is the usual array of data points and they are mostly weak, but none is a smoking gun of the sort which would have ignited the recovery.
Similarly, data on the docket in the US today will be weak but none of it is expected to be shockingly weak or provide fresh evidence that the economy has slipped deeper into recession.
The yield on the 2 year note has slipped 5 basis points to 1.23 percent. The yield on the 3 year note also dropped 5 basis points and it sits at 1.45 percent. The yield on the 5 year note edged lower by 6 basis points to 2.14 percent. (The Treasury will auction $26 billion 5 year notes today.) The yield on the 10 year note has tumbled 10 basis points to 3.22 percent and likewise the yield on the Long Bond has plummeted 12 basis points to 3.67 percent.
The 2year/10year spread has narrowed 5 basis points to 199 basis points. I think that is mostly the forward roll in to the new 2 year, so in reality it is unchanged when adjusting for the roll.
The 2 year/ 5 year/30 year spread is in the mid 50s when one employs all of the cash securities in the calculation. That spread traded in the low 90s last week and indicates a significant cheapening of the belly versus the wings and presages a salutary result for Hank Paulson and his minions when they peddle 5 year notes later today.
There are several items of interest on the economic calendar today.
Consumer Confidence for November will be published and it should remain at a multi year low around 38.
Commerce Department will release revisions to Q3 GDP which was originally released as -0.3. Economists expect small downward revisions.
The Case Schiller Home Price Index should record another fall in home prices when it is released later this morning.
Separately, the Treasury and the Federal Reserve are expected to unveil a new facility which is intended to stimulate lending to consumers. Inveterate publicity seeker and New York Senator Chuck Schumer has urged that funds be provided to make it easier for consumers to obtain financing for car purchases.
Separately, BHP has abandoned its efforts to acquire Rio Tinto (RTP) for a cool $66 billion. BHP cited the commodity rout and difficult credit markets as the reason for the change of heart.
IG11
IG 11 is opening at 255, which is a basis point tighter than the close. It is also 30 better than the widest prints last Thursday morning. One commentator / trader noted that the driving force in the IG 11 currently is CMBS desks who have taken to using the IG 11 as a (imperfect) hedge against their positions. If they should choose to lift hedges established last week, spreads could tighten some more.
