Bond Expert: Friday Wrap

Prices of Treasury coupon securities have, on balance, registered robust gains in response to the lugubrious labor report released this morning. While benchmark securities have registered gains they have retreated from the best levels attained earlier.

The yield on the 2 year note has slipped 7 basis points to 0.75 percent. The yield on the 3 year note declined 5 basis points to 1.12 percent. The yield on the 5 year note dropped 7 basis points to 1.51 percent. The yield on the 10 year note edged lower by 4 basis points to 2.40 percent and the yield on the Long Bond was unchanged at 3.05 percent.

The 2 year/10 year spread steepened 3 basis points to 165 basis points. The 2 year/5 year/30 year spread has oscillated wildly lately. It is closing the day at 79 basis points. In my opening comments on Monday morning I noted the spread was 27 basis points and had cheapened from 69 basis points on December 22. On Monday morning the relevant yields were 0.86 percent (2 year), 1.72 (5 year) and 2.85 percent (30 year). One can observe the change in the spread as the 2 year/5 year spread flattened 11 basis points over the week and the 5 year/30 year steepened 41 basis points. Helluva move!

Today was a very quiet day across sectors and traders and salespeople related that activity was limited.

It is my opinion that the market has reached a strange inflection point at which it is saturated with bad economic data yet it does not rally significantly. Until the data markedly worsen we are probably trapped in a range with 2.50 percent as the upper bound and something close to 2.00 percent as the lower boundary.

To break that range the data will need to markedly worsen or we will need a much stronger whiff of deflation.

Spread product will continue to tighten because the FOMC has told us that the funds rate will approximate zero for the rest of our natural lives. (I refuse to make any prediction regarding the hereafter.)

Corporate bond spreads are about unchanged. When bonds trade they trade on the right side. The IG 11 is 2 basis points better at about 201. The GE 30 year offered this week 100 basis points cheap to comparable GE paper at T+ 395 is wallowing in its own mess at 400/395. The GE 10 year is 360/340 which is unchanged. Budweiser under its new corporate name offered a multi tranche deal and the 10 year piece is slightly weaker at 530/520.

Have a great weekend. I want to thank the many readers who took the time to submit comments this week. They were excellent and always respectful of others views even whilst disagreeing. So thank you for an elevated level of commentary.

Comments

[vaughn:]

Remember what happened to the Muni market? There was a buyers' strike on that one given the bad economic, lousy labor market, etc.

The other day the German government failed to attract enough buyers for its $6 billion (euro) auction. Might call it a mini buyers' strike.

what will prevent a buyers' strike against treasury? It could happen given the fact both China and Japan (two consecutive months of negative trade surplus) could no longer buy the treasury en masse.

Jan 10 09:01 PM