Prices of Treasury coupon securities are suffering the slings and arrows of outrageous fortune as well as a malaise contracted from the belief that status quo ante is in the process of returning to the global economy and global financial markets. Today also begins a period of record issuance by the US Treasury, and the confluence of those factors has driven bond yields higher in overnight trading.
The yield on the 2 year note has climbed 3 basis points to 1.03 percent. The yield on the 3 year note has climbed 5 basis points to 1.60 percent. The yield on the 5 year note has also climbed 5 basis points and rests at 2.58 percent. The yield on the 7 year note has jumped 6 basis points and begins the New York trading day at 3.28 percent. The yields on the 10 year note and the yield on the Long Bond have each risen 4 basis points to 3.70 and 4.58, respectively.
The 2 year/10 year spread has widened a tad to 267 basis points.
The 10 year/30 year spread is unchanged at 88 basis points.
And in an indication that supply is taking a harsh toll on the belly of the yield curve, the 2 year/5 year/30 year butterfly has narrowed to 45 basis points.
Equity markets around the globe are ebullient, enthusiastic and energized, and in thrall to the notion that all is well and if it is not well it will be soon. Bloomberg carried a story that the Japanese stock market had risen for a ninth consecutive day. That is the longest such winning streak since 1988.
I also observed a story that the stock market in China has doubled from its low. (When I was younger, with much more hair than I have now, I owned a copy of Quotations from Chairman Mao. I do not recall him commenting on the stock market in that little red book.)
Pre market trading indicates that the US equity market will open with modest gains, too.
I was speaking with a former customer last week who offered the proposition that the equity market rally (globally) is a massive short squeeze. The squeeze springs from a massive outright short in equities as well as shorts versus other sectors of the capital markets. The rally will prove unsustainable as investors realize that global economic recovery will be quite slow and there will not be a V but a W.
The supply tsunami of which I have written begins today with bill auctions and the reopening of 20 year TIPS. The TIPS auction will total just $6 billion and for that small size should go well. I do not follow the spread on 20 year TIPS but do follow the 10 year breakeven spread. That spread is currently close to 190 basis points and on the expensive side of its recent range.