Bond Expert: Friday Wrap

Prices of Treasury coupon securities opened weak on the back of the Financial Times article about the potential for shifting language in the FOMC policy statement, and maintained that weakness. There were some subtle shifts over the course of the day in the construct of the yield curve which shed some light on the nature of the price action.

At the beginning of the day the 2 year/5 year curve was 142 basis points. As I pen this it has widened to 144 basis points.

The 2 year/10 year spread began the day at 246 basis points and sits currently at 249 basis points.

If there were a fear that a move by the Federal Reserve to higher rates was impending, those spreads would be narrowing and not moving wider. I think that these movements reflect supply concessions for the auction supply which will present itself next week. Selling by corporate Treasurers in advance of the next week’s supply has caused some to dub Friday as Rate Lock Friday. I think that the rate locking this day is in advance of the US Treasury supply.

The 2 year/5 year/30 year spread which I regularly chronicle here tells the same tale as the other spreads. It opened the day at 44 basis points and the 5 year has cheapened to 42 basis points.

Once again the supply is a factor.

The new 2 year note should garner solid buying support from central banks spending intervention money. The forward roll into the WI issue is 6 basis points and the 1.05 percent level has attracted some central bank money.

Someone pointed out to me that the combined duration drop of the 5 year and 7 year notes next week is the equivalent of about $85 billion 5 year notes. With that much paper for sale pretty much everything from the 3 year through the 10 year will feel the pressure of those offerings.

For the record, the 10 year note has cheapened a basis point versus the 30 year and sits at 81 basis points.

Dealers reported macro based hedge fund selling in the 2 year sector.

Another dealer noted quite a bit of activity from hedge funds in FX with many covering dollar shorts against the Euro, Canada and Australia.

The yield on the 2 year note has climbed 5 basis points to 0.98 percent. The yield on the 3 year note has also climbed 5 basis points to 1.54 percent. The yield on the 5 year note has increased 6 basis points to 2.42 percent. The yield on the 7 year note rose 5 basis points to 3.07 percent. The yield on the 10 year note climbed 5 basis points to 3.49 percent. The Long Bond was the relative value superstar as its yield increased just 4 basis points to 4.28 percent.