Bond Expert: Wednesday Wrap

Prices of Treasury coupon securities surged today and, since the inverse relationship between price and yield is intact,yields fell.

The reason for the so called local trade or day trade can be placed at the feet of the stories about the FX market. Non dollar currencies improve and authorities in those venues intervene to stem the slide of the once mighty greenback.

With newly purchased dollars needing a place to park, the flow of funds wends its way to the belly of the Treasury curve and all is well with the world.

The principal rumor today was that the Russians had placed a large order in the belly of the Treasury curve and made dealers who were short for the 10 year uncomfortably short.

That make some sense for the short strokes, but I think that a little thoughtful analysis of some anecdotal evidence tells us that, even a year since the world nearly rushed headlong off a cliff and into an abyss, there are still numerous problems which need solution.

I rarely watch CNBC but had it on briefly today. They presented an interesting story about Target (TGT) slashing toy prices to match previously announced cuts from retail behemoth Walmart (WMT). Here it is two months in advance of Christmas and these fellows are already jousting for their share of the consumer’s wallet. How bad can it be and how much worse will it get if they are already at it?

To reinforce the penurious mood of the consumer, the Federal Reserve released data today which showed that credit fell by $12 billion in August or by an annualized rate of 5.8 percent.

That is the seventh consecutive monthly decline in that metric and represents, I think, the consumer's attitude regarding his or her wealth and income prospects. I think that anyone expecting a rapid recovery should review the evidence. If you are honest about it it -- most unlikely.

One last note. I rarely follow T bill rates but I noted today that the three month bill trades at about 6 basis points. That tells me that there is too much money sloshing around seeking safety. Too much money that is not being lent. And probably too much money about to ignite the next bubble (Treasuries) as it flees low yields for higher yields out the curve.

Maybe all this means that we are setting up for a giant duration grab which will leave the curve far flatter than anyone though possible. Investors will delude themselves into thinking that there is no risk in a 10 year Treasury or a 30 year bond.

When everyone is in the pool someone will saunter by and throw a plugged in toaster into the deep end. It will surely end very ugly.

Anyway, I run on.

The yield on the 2 year note declined 5 basis points to 0.86 percent. The yield on the 3 year note dropped 7 basis points to 1.36 percent. The yield on the 5 year tumbled 8 basis points to 2.16 percent. The seven year note was the relative value winner today as its yield dropped 9 basis points to 2.76 percent. The yield on the 10 year note fell 8 basis points to 3.17 percent. The yield on the Long Bond dropped 7 basis points to 3.99 percent.

The belly of the curve continues to roar ahead.The 2 year/5 year spread collapsed by 3 basis points (flattened) while the 5 year/30 year spread widened a basis point. The butterfly which I chronicle religiously here is 53 basis points.

The 2 year/10 year spread narrowed 3 basis points to 231 basis points to 231 basis points.

The 10 year/30 year spread widened a basis point to 82.

Comments

[Bull Run:]

John; I agree with your premise, that too many US dollars are floating around, without being lent, trying to find a home. Eventually they will end up in the economy as inflation. Since the mere size of the bail-outs, stimulus packages, treasury supports, Fed lending to Banks, are beyond anyones imagined number, the results will soon begin showing-up, and be beyond anyones wildest guess.

Oct 07 08:39 PM

[Jason Rines...:]

I wanted to tell you Mr. Hansen that your bond analysis has been my favorite on the Internet. You're correct on your insights consistently. No, the story does not end well. But I am going to keep dancing until the music stops ;)

Be prepared for some geopolitical events in 2013. Call me if you would like me to explain. Least I can do for all of your time. 603 953 3388. Do a search here at SA under ithinkbig & Russia. Also do one for same screen name and Clash of the titans. From one gentleman to another.

Oct 07 09:48 PM

[Jason Rines...:]

Jansen. Darn iPhone keypad ;)

Oct 07 09:49 PM

[squark62:]

good article as usual...

Oct 07 10:07 PM