Bond Expert: Thursday Wrap

Prices of Treasury coupon securities surged today as investors completed the purchase of $104 billion of notes issued this week by taking that seven-year note offering at a full sprint. The market continued to trade higher following the auction, and as we speak is punching out new low yields for this move. It was two weeks ago today that the 10 year note traded at 4 percent and the Long Bond touched 4.82 percent.

I think that there are several factors at work today. At auction time the 7 year note was at the very cheap end of its range, when one gauges it versus against the 5 year note and the 10 year note. At the time of the bidding the 5 year/7 year/10 year butterfly was 36 basis points. The range since the renaissance of the 7 year note is 40 to 0. So it is at the very cheap end of the range.

Day traders thought (as I did) that it would be a huge task to sell 7 year notes without some concession. The issue lacks natural sponsorship, and following the 2 year and 5 year auctions, conventional wisdom held that it would be a tough sale. Well, the record shows that it was not, and now a gaggle of speculators has suffered a wasted afternoon as they judiciously reel in shorts. One trader (who was short) noted that it was probably a case of many small and medium shorts rather than some concentrated position.

Central bank interest in this one could have been genuine (for those of you who see the smoke on the grassy knoll) . The Swiss National Bank has intervened the last two days to actively debauch its own currency, and it has probably bought some dollars. Those dollars would probably enjoy a warm cozy home on the 7 year part of the treasury curve.

The yen has strengthened and it would not be unusual to see some active Japanese clients taking advantage of dollar weakness to buy into some US assets.

Separately, month end is approaching and that always brings demand from indexers. There might be some buying in advance of that monthly episode.

As I mentioned at the outset of this post, the market has broken out of the range. The high yield on the 10 year note today was 3.72 percent. One trader with a technician's bent said that the market shall remain in an uptrend as long as we do not violate that 3.72 percent. He opined that in the short run we are overbought, but thought that a large enough group had missed the rally that any backup would see buyers emerge.

Note how the belly of the curve outperformed today.

The yield on the 2 year note declined 11 basis points to 1.11 percent. The yield on the 3 year note dropped 12 basis points to 1.64 percent. The yield on the 5 year note cratered 16 basis points and rests at 2.58 percent. The yield on the 7 year note plummeted 17 basis points to 3.20 percent and the 10 year note drooped 15 basis points to 3.54 percent. The yield on the Long Bond tumbled 10 basis points to 4.33 percent.

The 2 year/10 year spread narrowed 6 basis points to 243 basis points.

The 2 year/5 year/30 year spread is 28 basis points. It traded in the single digits earlier in the week.

Earlier in the week I described the ratio of the 5 year yield to the average of the 2 year yield and the 10 year yields as being at three-decade wides at 1.13. That ratio, reflecting the improvement in the belly, has slipped to 1.10.

Commodities and Agencies

(3:12 pm ET) Corporate bond spreads are unchanged as someone pressed the pause button for the corporate bond market. One veteran salesman and steadfast friend of the blog opines that the market is treading water.

He notes that at the moment bid wanted requests outweigh offers wanted. Very little is trading on either side as investors wait for quarter end to pass.

My contact thought that there was some chance that spreads could crack for a 10 basis point or 15 basis point widening. He doubts that spreads could widen much more than that.

There is still a huge appetite just below current levels for quality investment grade corporates. An episode of widening such as I described above should attract buyers.

Supply has been underwhelming and that is supportive of bond spreads. And it appears that we have dodged a trip to Armageddon and as long as the economic data is benign, bonds will remain at the tighter end of the range.

The 30 year Time Warner (TWX) from yesterday is about a nickel tighter at 255.

Agency spreads are 3 basis points to 5 basis points tighter across the curve. Client flows are mixed.

Comments

[pdub271:]

It sounds like there's still enough faith in the future of the dollar, at least for the time being.

Jun 26 12:43 AM

[popey:]

Dead cat bounce.

Jun 26 04:15 AM