Bond Expert: Thursday Outlook

| About: SPDR Barclays (TLO)

Prices of benchmark US Treasury securities are virtually unchanged in overnight trading. The yield on the 2 year note is 0.92 basis points. The yield on the 3 year note is 1.48 percent. The yield on the 5 year note is 2.36 percent. The yield on the 7 year note clocks in at 3.06 percent. The yield on the 10 year note rests at 3.47 percent. The Long Bond yields 4.33 percent.

The 2 year/10 year spread begins the trading session at 255 basis points.

The 10 year/30 year spread opens at 86 basis points.

The 2 year/5 year/30 year spread is 53 basis points.

For the record, the 5 year/10 year spread is making a new wide for this move at 111 basis points.

The highlight of the session will be the $12 billion reopening of the 30 year bond by Tim Geithner and his minions at the Treasury. The first two legs of this refunding went quite well and bidders for those bonds have profits, albeit small ones.

The 30 year is a different animal as there are not as many natural buyers as there are of paper in the belly such as the 10 year note. The issue has cheapened significantly for sure as one can see by observing the 10 year/30 year spread as well as the 5 year/30 year spread and the 2 year/5 year/30 year butterfly which I chronicle here ad nauseam.

However, I would argue that in an environment in which the Treasury offers a never ending supply of paper, there has not been enough of an outright yield concession to justify buying this bond.

The issue is cheap versus its yield curve cousins but that trade requires the sale of something else to make it work. I think that this auction alters the supply/demand technicals and makes the street long securities. When the street shifts from short paper to long paper the market will trade differently as traders busy themselves looking to exit paper.

In short I think that this is an instance in which the market will suffer declines once the street actually owns the bonds. There is no instantly compelling fundamental reason to buy this bond. And furthermore we are about to lose the marginal buyer as the Federal Reserve tapers down its purchase program.

At 830AM we receive data on initial jobless claims and the monthly trade balance.

Bloomberg says that the consensus on jobless claims is 565k after a 57k print last week.

Bloomberg estimates that the monthly trade balance in July was -28 billion after a -27 billion print in June.