Bond Expert: Monday Wrap

Prices of Treasury coupon securities opened stronger but are finishing the day with small mixed changes.

The yield on the 2 year note is one basis point lower at 0.89 percent. The yield on the 3 year note is unchanged at 1.40 percent. Longer dated benchmark issues retreated 3 basis points. The yield on the 5 year note is 2.25 percent and the yield on the 7 year note is 2.92 percent. The yield on the 10 year note is 3.3 percent and the yield on the Long Bond is 4.23 percent.

The 2 year/10 spread is 244 basis points.

The 10 year/30 spread narrowed a basis point to 90 basis point after opening at 91 basis points.

The 2 year/5 year/30 year spread is 62 basis points. It is about 10 basis points narrower than the level at which it opened this morning.

The breakeven spread on 10 Year TIPS is 153 basis points. That spread has narrowed 10 basis points since the auction and it remains cheap in spite of the fact that the central bank will buy TIPS later this week.

Several factors motivated trading today.

The stock market is ebullient in response to some bullish comments about the financial sector by Whitney Meredith. That has sucked some of the life from the bond market.

There was some paying in swaps as a hedge and that weighed on sentiment, too.

The Treasury released details of the budget deficit through June and it pierced the $1 trillion level. By the time the fiscal year is over in September the number should approach $2 trillion.There was not much new here but the reality of breaching that level led to some trader sales.

This is a dark horse of a reason, but someone suggested machinations in the Illinois budget process might have led to some selling. Apparently, the state legislature passed a budget which will lead to the sale of $31 billion of bonds which will finance some construction projects.

The market is poised to receive data on PPI and retail sales tomorrow. Economists at UBS are forecasting a 0.4 percent gain in retail sales. Much of that will be led by gasoline prices. The economists at UBS suspect that real spending will have fallen 0.7 percent for the month and 0.9 percent for the quarter.

Gains in gas prices probably led to an increase of 0.9 percent in headline PPI.

Swaps, MBS and Vol

(2:51 pm ET) Mortgages are unchanged to swaps today. I have heard of isolated sales of high coupons by domestic money managers and some buying from end users domiciled on the continent of Asia.

Volatility is sliding. The three month at the money option on the 10 year swaption straddle is trading at 596. I think that just prior to the 4th of July holiday it traded in the 690s.

Swap spreads are wider across the yield curve. Two year spreads are 3 1/4 basis points wider at 42 1/4. Five year spreads are 1 3/4 basis points wider at 44 3/4. Ten year spreads are 1 1/2 basis points wider at 19 1/4. Thirty year spreads are 1 1/4 basis points less inverted at NEGATIVE 24 1/2.