Bond Expert: Monday Outlook

Prices of Treasury coupon securities are posting very small mixed changes in overseas trading.

The yield on the 2 year note is unchanged at 1.11 percent and the yield on the 3 year note is unchanged at 1.62 percent. The yields on each of the other benchmark securities has declined 2 basis points. The yield on the 5 year note is 2.54 percent. The yield on the 7 year note is 3.18 percent. The yield on the 10 year note is 3.52 percent and the Long Bond yields 4.32 percent.

There is no coupon supply from the Treasury this week. That will change with a vengeance next week when there will be bidding Monday through Thursday. This Thursday the Treasury will announce a 10 year TIPS auction (for Monday) and 3 year, 10 year and 30 year auctions for Tuesday, Wednesday and Thursday.

I am not sure of the size of the TIPS offering but the 3 year, 10 year and 30 year offerings should be in the neighborhood of $65 billion (in total).

The 2 year/10 year spread is 241 basis points.

The 2 year/5 year/30 year spread is 35 basis points. Recall that amidst the supply tsunami last week it had collapsed to single digits.

The Federal Reserve has tentatively scheduled two buybacks for this week. Tomorrow the Desk plans a purchase of the May 2015 through May 2019 sector. On Wednesday they Desk will intervene in the August 2019 through February 2026 sector.

Eurozone confidence increased to 73.3 in June and is at its highest level since November.

UK home loan approvals claimed less than expected and produced smallest gain since record keeping began in 1993.

Japanese industrial output surged 5.9 percent in May as cars and electronics rebounded.

It is a light data day in the US with only the housing affordability index on tap. It was down 1.9 percent in May after gaining 1.7 percent in April. UBS economists expect another decline with the June posting.

However, UBS economists note that even if mortgage rates rise 60 basis points the index has improved over 30 percent YoY and (except for the last five months) is at its best level since 1971.

I expect that the bond market will have a bullish bias today and tomorrow. There will be normal month end index extensions and additional balance sheet buying for quarter end. There is also one buyback and probably some anticipation of the second.

If I am correct and the market trades well through 3.50 percent I might taking a stab at trading from the short side in anticipation of the heavy wound of supply on the schedule for next week.

Comments

[whidbey:]

The comments from Europe that they expect the demand for dollar denominated securities will grow substantially this year is music to the Fed's ears. Why this happy talk? I would guess that things are looking so poorly in the EU that comparatively the USA looks like a better bet for yield. The pricing of the TIP offerings will be watched to see what the conservative bond buyers think of the veracity of the Treasury and the principals.

Jun 29 09:44 AM

[Bull Run:]

On the 24th the Fed announced it would do $1.8 trillion in treasury buy-backs. Where does that money come from? America's new found technology. The printing press.

Jun 29 02:39 PM