Bond Expert Friday Wrap: Duration Rout

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.

JJJ

Comments

[Macro_Man:]

Giddy up, false breakouts are not good. Wouldn't be surprised to see more ground being given up on Tuesday and Friday. Reminds me of the action from May 21 to May 28th. Waiting to load up on TLT again in the low 90s if the market shows sign of stabilizing there.

Oct 09 04:07 PM

[Thomas J. G...:]

is this "merdurinous scent" the same as the French merde?

Oct 09 05:10 PM

[Tony Petroski:]

From the author:

"By the end of the day the long end of the market had a merdurinous scent about it "

51 years and I've never encountered in writing a "merdurinous scent." I've smelled it before, but we called it something else.

Thomas J. G. It must relate to merde, and that ain't Chanel #5.

Oct 09 05:54 PM

[JeffDB:]

"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 ... 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."
----

They still seem waaay low to me, particularly given that the US dollar index has dropped some 13.7% since March despite massive buying by central banks around the world, and we have monster deficits looming as far as the eye can see. I don't think those yields are going to keep up with inflation *pre-tax* and they seem to be quite risky to me despite rates that have "catapulted" upwards.

Oct 10 03:07 PM

[dieuwer:]

I wonder where the rate ceiling for Bernanke is (if any). 4% for a 10-Y treasury?
I asks this because I am contemplating shorting IEF or TLT. But if Bernanke monetizes "heavily" the longer durations ( to keep yields low), than it makes no sense to short.

Oct 10 05:28 PM

[oldgoldbug:]

Interestingly TLT has lost a mere 58% to GLD this year in market value though the income to date of about 3% will narrow the loss to a more palatable 55%. It sure looks like bonds would be a decent buy on any decline, but the action the past 6 days is alarming, as TLT has lost 3.9% of its nominal value, closing at 95.81. A drop below the lows of 88-89 would likely signal the long awaited "other shoe" has dropped. If coupled with continued gold advances, it will blast apart the facade that the economic situation is under control.

Oct 11 05:02 AM