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Prices of Treasury coupon securities surged today as the painful neutering of wealth in the equity markets redounded to the benefit of bondholders as risk aversion regained popularity.

The yield on the 2 year note slipped 6 basis points to 0.91 percent. The yield on the 3 year note dropped 9 basis points to 1.28 percent. The yield on the 5 year note tumbled 11 basis points to 1.87 percent. The new 7 year was a relative value superstar as its yield declined 13 basis points to 2.56 percent. The yield on the 10 year note fell 10 basis points to 2.92 percent and the yield on the Long Bond dropped 5 basis points to 3.66 percent.

The 2 year/ 10 year spread narrowed 4 basis points to 201 basis points.

The 2 year /5 year/30 year spread richened by 14 basis points today to 83 basis points from 69 basis points at the previous close. To put that in some perspective and demonstrate the power of the belly versus the wings, today the 5 year flattened against the 2 year by 5 basis points and steepened versus the 30 year bond by 6 basis points.

The new 7 year note continues to trade very well. The 5 year/7 year /10 year butterfly is now 32 basis points after closing Friday at 35. Most of the strong performance of the issue is versus the 10 year note. During the WI period the 7 year/10 year spread had narrowed to 24 basis points. That spread is now 37 basis points.

The level of activity which I have discerned in the Treasury market has been light. There was some hedge fund buying in the three year sector and some prop traders establishing curve steepening positions. Those traders believe that the weight of 10 year supply and 30 year supply will widen spreads as the week progresses.

Richmond Federal Reserve President Lacker today echoed comments made last week by his colleague Plosser in which each suggests that the Federal Reserve should not be in the business of managing credit exposure. Lacker suggested that the risky assets on the books of the Federal Reserve should properly be on the books of the Treasury. Philadelphia Reserve Bank President Plosser made a similar statement last week.

The grand poobah of the Federal Reserve System, Ben Bernanke, will testify before the Senate tomorrow on the budget. We will have a chance to see how verbally agile he is when we hear him discuss the vagaries and virtues of $1.75 trillion deficits.

Agency spreads widened by about 3 basis points in the 2 year and 3 year sectors and by about 2 basis points in the 5 year sector. Ten year spreads widened by about 5 basis points. There was no particular catalyst for the widening of spreads other than the rally in the Treasury market.

Source: Bond Expert: Monday Wrap