Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities have posted modest and uniform gains in overseas trading.

There was a baseball announcer for the Brooklyn Dodgers (whose name I can't recall) who would sometimes proclaim that deuces were wild when there were two men on base and two out and sometimes the score might be tied two to two. Anyway, that statement is appropriate in the bond market as each of the benchmark issues registered a two basis point decline in yield overnight.

The 2 year note yields 0.94 percent. The newly minted 3 year note yields 1.49 percent. The 5 year note yields 2.33 percent. The 7 year note yields 3.04 percent and the 10 year note yields 3.43 percent. The Long Bond yields 4.28 percent.

The 2 year/10 year spread is 249 basis points.

The 2 year/5 year/30 year spread is 56 basis points.

The Treasury market will have a dual focus today. One eye will be on the wobbly equity market and the other will be on the Treasury auction of $ 20 billion 10 year notes.

The equity market broke through key support levels yesterday. Another round of weakness in that market will obviously support the treasury market and motivate some to seek solace and succor in the safety of risk averse assets.

Without support from the equity markets I would expect some brief local concession at auction time. That would mean some spillage back towards 3.50 percent on the 10 year note and a 2 year/10 year spread in the mid 250s.

The economic calendar in the US is light again today with Consumer Credit for May the only major release. The consensus sees a decline of $ 8.8 billion after a$15.7 billion decline in April.

There was quite a bit of economic data released overseas. I would categorize it as mixed.

Machine tool orders in Japan unexpectedly declined 3 percent in May from April.

Consumer confidence in Australia reached a nineteen month high in July as it gained 9.3 percent to 109.4.

Home prices in the UK fell 0.5 percent after gaining 2.6 percent in the previous month.

UK consumer confidence rose to an eight month high of 58 in June from 54 the previous month.

German Industrial Production posted its sharpest gain in 16 years as it in creased 3.7 percent from the May level.

In retrospect, I would say that the data is mostly positive rather than mixed.

Swap spreads are tighter across the curve. Two year spreads are 2 basis points tighter at 36. Five year spreads are 2 basis points tighter at 40 1/2. Ten year spreads are 3 basis points tighter at 16 1/2. Thirty year spreads are 3 basis points tighter at the very ludicrous NEGATIVE 22 1/2.

I wondered what it was that drove swap spreads tighter overnight. I suspected that the crazed crowd of convexity craving clients had something to do with it. I do not have the unequivocal answer but one dealer whose morning email I regularly read notes some convexity-based buying of MBS yesterday and more overnight from Asian investors.

Recall that it was this kooky crowd who drove the 10 year to 4 percent. As I said then, they nearly always sell the lows and buy the highs. They also push the market to extremes in each direction. If the convexity need is real and widespread, then this rally will have more legs.