Bond Expert Friday Wrap: Duration Rout

Includes: BIV, TLO, TLT
by: John Jansen

Prices of Treasury coupon securities plummeted today and the initial round of curve flattening turned into a duration rout and a severe bout of curve steepening.

The early curve flattening resulted from (I think) faulty interpretation of the Bernanke peroration of last evening. The utterance of the phrase “exit strategy” invoked fear amongst the uninformed, I guess.

By the end of the day the long end of the market had a merdurinous scent about it and the yield curve had significantly reversed course and is a bunch steeper on the day.

At the opening this morning the 2 year/5 year spread was 133 basis points. That spread is now 138 basis points.

The 2 year/10 year spread was 234 basis points and it is now 242 basis points.

The 2 year/30 year spread was 316 basis points early this morning and it is now 326 basis points.

That tells me that dealers were shedding recently purchased 10s and 30s and real investors probably joined them in that pre weekend frolic. The price action is ugly and places the market dead center in the 3.50 percent to 3.25 percent range which held for so long. The market had its chance at a breakout and failed.

There is quite a bit of information to digest in the holiday shortened week next week. We will receive data on CPI, retail sales, IP, manufacturing in the Philadelphia region and manufacturing in the New York region.

The central bank will also release minutes of the most recent meeting and we will see how much time the Committee spent chewing the fat regarding exit strategies.

The yield on the 2 year note jumped 8 basis points to 0.96 percent. The yield on the 3 year note climbed 9 basis points to 1.50 percent. The yield on the 5 year note soared 12 basis points to 2.34 percent. The yields on each of the longer benchmark securities catapulted a troubling to triskaidekaphobiacs 13 basis points. The 7 year note yields 2.97 percent and the 10 year note yields 3.38 percent. The Long Bond rests at 4.22 percent.

[NB: Bond market closed early today and will be closed Monday for Columbus Day. - Ed.]

Enjoy the weekend.