Prices of Treasury coupon securities languished today in a listless, lackluster trading session dominated by the impending crisis of a rather heavy spate of issuance from Timothy Geithner next week. As I have noted previously, the Treasury will immerse the investing public in a bath of $112 billion of securities. So on a very quiet Friday with no economic data, traders began the process of shooting the taxpayer in the big toe in advance of the issuance next week.
The yield on the 2 year note has increased 6 basis points to 0.99 percent. The yield on the 3 year note has climbed 8 basis points to 1.56 percent. The yield on the 5 year note has climbed 9 basis points to 2.45 percent. The yield on the 7 year note increased 9 basis point, also, to 3.10 percent. The yield on the 10 year note jumped 8 basis points to 3.47 percent. The yield on the Long Bond increased just 5 basis points to 4.22 percent.
One can see the influence of supply on the yield curve. The heaviest duration load is in the 5 year and the 7 year sectors with $40 billion 5 year notes and $29 billion 7 year notes set for auction.
That supply is weighing on sentiment as the 2 year/5 year/30 year butterfly is 31 basis points after opening the day at the 36 basis points. That 5 basis point move represents underperformance by the 5 year versus the wings.
One can also look at the 10 year note versus the 2 year note and the 30 year bond. The 10 year note has steepened 2 basis points versus the 2 year note and flattened 3 basis points versus the 10 year note.
The 2 year/10 year spread is out to 248 basis points and the 10 year/30 year spread has narrowed to 75 basis points. On the day of the 30 year bond auction, that spread traded at 87 basis points.
Next week the auction bidders will confront an FOMC meeting and the priceless tension which develops as participants wait for the announcement of the outcome. (I think that they should take a cue from the Vatican when the College of Cardinals meets to choose a new Pope after the death of the previous Pope. I think they should send puffs of smoke from the chimney on Constitution Avenus and go medieval.)
Anyway, the focus will be on the statement which the gathered solons release at the meeting's conclusion. I think that they will genuflect to the slight improvement in the economic data and will slightly upgrade their assessment of the economy.
They will also note that inflation is not now a problem nor is it likely to be for the rest of our natural lives here in this vale of tears.
It might get interesting if they address the various forms of QE in which they are currently engaged. In the statement at the conclusion of the last meeting, the Committee addressed the end of its Treasury purchases. It announced its intention to slowly wean the market from dependence on Mother Fed by stretching out the conclusion of its Treasury program until the end of October.
I think that they will avoid the issue this time regarding MBS and direct obligations of GSEs. I think that they will wait until the next meeting to address how they will conclude their buying in MBS and Agencies.
The MBS market is on a heavier dose of Federal Reserve steroids as the Fed buys about $ 5 billion a day of MBS. I can not imagine a circumstance in which the FOMC would surprise the market and announce some premature end to the program.
I think they say nothing this time and then engage in Fed speak and the appropriate leaks to the press about what they will say at the next meeting. My guess is that at that time they will employ the same tactic which they have used in the Treasury market. The Open Market will slacken the pace of MBS buying and extend the program into Q1 2010.