Bond Expert: Friday Outlook

Prices of Treasury coupon securities are posting mixed results in overnight trading but within the stack of benchmark securities there has been a noticeable flattening of the yield curve.

I was in the insomniac zone last night and was up late writing. I wrote about the Bernanke speech. I thought that he broke no new ground. Absolutely none. But some of the headline writers have focused on the fact that he mentioned that the Federal Reserve will raise rates when the economy recovers. Well, I wonder who would have been so obtuse as to think otherwise?

As I noted he began his section of the speech in which he discusses the tools which the FOMC can use to raise rates with the injunction that he and his colleagues will maintain a low level of funding for “an extended period”. He was unequivocal about that.

Less friendly was another story which I posted which suggests that the Open Market Desk is “practicing” reverse repo. I can not imagine that the Federal Reserve will do anything to raise rates with the unemployment rate rising. In my opinion it will not happen especially as a political year (2010) looms on the horizon.

If the Federal Reserve were to raise rates in the face of still high unemployment rates I can only imagine the glee among the Barney Frank’s of the world as they could run against the Federal Reserve rather than the Republicans.

I also believe that an independent central bank is vital and I think the unintended results of that confrontation between alleged populists and a bunch of aging apparatchiks would not end happily for either the Federal Reserve or the dollar.

Anyway, there is quite a bit of news out there that at least on the surface bearish for bonds.

In addition to that the bond auction result was a debacle yesterday. The price action following that auction spoke volumes and said that many who bid for bonds won a larger award than they expected. Those less than happy holders pummeled bids and sent yields spiraling higher.

I think those same bonds will be for sale today and the price action will be heavy.

I would watch the 3.30 percent level on the 10 year note. That is key support. If we breach that level and sustain trading in the low 3.30s then the market has more downside in store for itself and the recent run to lower yields was a ephemeral.

The yield on the 2 year note has climbed 5 basis points to 0.93 percent. The yield on the 3 year note has climbed 4 basis points to 1.44 percent. The yield on the 5 year note increased 4 basis points to 2.26 percent. The yield on the 7 year note increased 3 basis points to 2.87 percent. The yield on the 10 year note edged higher by 2 basis point to 3.27 percent and the yield on the Long Bond is unchanged at 4.09 percent.

The 2 year/10 year spread is 234 basis points.

The 10 year /30 year spread is 82 basis points.

The 2 year/5 year/30 year spread is 50 basis points.

The curve is flatter and the belly is underperforming.

Comments

[Macro_Man:]

I agree...the fact that we broke out of the trading range and on to lower yields on the 10yr and 30yr...but then got forced back into the range is not good price action. Especially, if we get forced into higher yields today. Then I think we will be back into the 4.15% to 4.30% trading range on the long bond. The feeble dollar is not helping as well. Until the dollar puts in a meaningful bottom and stocks a meaningful top, the rally in long Treasuries is over I think. I have been consistently been playing TLT from the long side, but yesterday, post auction, was almost tempted into TBT. Don't think I will do that even though I think rates have higher to go...but will wait for rates to sell off and if they do, then play it again from the long side. Patience over the next few weeks is key!

Oct 09 08:48 AM

[PCScipio:]

"I can only imagine the glee among the Barney Frank’s of the world as they could run against the Federal Reserve rather than the Republicans." I don't get this, but it's probably best if you keep political commentary out of your posts.

Oct 09 12:09 PM