Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities have posted solid gains in today's trading. Most of the gains were subsequent to the announcement of the result of the 2 year note auction. I would have thought that the immediacy of the FOMC announcement tomorrow as well as the spate of supply on tap tomorrow and Thursday would have tempered the urge to buy.

That is not the case, and I am hearing of solid central bank interest in the belly of the Treasury curve as well as real money and speculative demand on the long end of the curve.

There was some corporate issuance today, and some believe that machinations at pricing will result in bonds leaving the street and an attendant bid for Treasuries.

I think that the Treasury decision to mature Special Purpose bills is a factor, too. Some $35 billion such bills mature this week. That represents $35 billion which needs to find a home. That money will for the most part find a home in the fixed income market and particularly in the short end of the fixed income arena. If you held that bill today (it matures September 24th) you are unlikely to go from the most risk averse instrument on the list to equities or the Long Bond. It has been my experience that in this situation the money would end up in the zero to 5 year part of the Treasury curve.

One other factor at work. I do not have a publication source for this but it is from my usual conversations with market participants. Several have reported that the anticipated flood of money into the system is driving down bill yields, and that has chased some money into bond funds.

Others report that the demise of the FDIC guarantee of money funds has also sparked some interest in government-only bond funds.

So in spite of the record breaking supply, there is still a ton of cash on the sidelines seeking a home.

The yield on the 2 year note declined 3 basis points to 0.95 percent. The yield on the 3 year note also slipped 3 basis points to 1.51 percent. The yield on the 5 year note fell 4 basis points to 2.41 percent. All of the other bench mark issues experienced 4 basis point yield declines. The 7 year note yields 3.07 and the 10 year note yields 3.44. The Long Bond yields 4.20 percent.

Changes along the yield curve are minimal. The 2 year/10 year spread is 249 basis points.

The 10 year/30 year spread is 76 basis points.

The belly has improved a tad versus the wings as the 2 year/5 year/30 year spread is 33 basis points.

This was written earlier than normal (3:24pm ET) as I am off to PT for my back.

Comments

[Ad Orientem:]

John,
Excellent summary as usual. Maybe I am being too pessimistic but it strikes me that the bond market is a little pricey right now. Yields are at historic lows and even a modest spike in inflation would result in negative returns on a lot of the bonds being issued right now.

What is your take on this? And how do you feel about foreign debt as a means to diversify the bond part of a portfolio? I am becoming rather interested in a diverse selection of non-USD government or high grade corporate debt. I am also looking at some foreign bond funds.

As a caveat I am a long term dollar bear and am likely to remain so until I see some credible evidence of a return to fiscal / monetary restraint in Washington.

Sep 22 07:19 PM