Bond Expert: Tuesday Outlook

Prices of Treasury coupon securities have registered small losses in listless overseas trading.

The yield on the 2 year note increased a basis point to 0.95 percent. The yield on the 3 year note climbed 2 basis points to 1.47 percent. The yield on the 5 year note edged higher by 2 basis points to 2.40 percent. The yield on the 7 year note climbed 2 basis points to 3.15 percent. The yield on the 10 year increased 3 basis points to 3.53 percent and the yield on the Long Bond increased a solitary basis point to 4.37 percent.

The 2 year/10 year spread widened to 260 basis points.

The 2 year/5 year/30 year spread is 52 basis points. It closed yesterday in the upper 40s and continues to move in favor of the 5 year note. During the market debacle in June the 5 year note traded only 5 basis points rich to the wings and has enjoyed quite a renaissance over the last several weeks.

In the US today there is a dearth of economic data to guide trading. The main focus of market participants will be the 100PM auction of $35 billion 3 year notes. I am not sure of the results for this auction. This is the sector of the market in which the central banks have the greatest interest so there should be sponsorship of sorts from that quarter. However, there has been significant improvement in the market and I wonder if current levels will appear as attractive to investors.

If I use the 2 year note as a proxy it has returned to levels which prevailed prior to the June Labor report. In that prior period the issue traded rather boringly below 1 percent and forays above that level attracted buying. In the ludicrous debacle following the June report the 2 year note traded with as high a yield as 1.44 percent. Succinctly stated, the issue has rallied 50 basis points and it has lost some of its luster.

The other problem for the 3 year note is the steepness of the yield curve. Over the last several days it seems that every speculator has in position some sort of curve steepening trade. It is a quite crowded position and I question if traders will want to add to that trade at these levels.

Consequently, I think the possibility exists that the result of the auction today might be less than festive.

There was some economic data overnight.

German manufacturing orders surged 4.4 percent in May for their largest gain since June 2007. They are still lower by a chunky 29 percent YoY.

In the UK factory production declined for the first time in three months as it tumbled 0.5 percent in May.