Bond Expert: Wednesday Wrap

 |  Includes: IEF, IEI, SPY, TLO, UUP
by: John Jansen

Prices of Treasury coupon securities staged another impressive performance as the market showed unwavering strength into the teeth of record issuance by the Treasury. The market maintained its firm tone today despite a significant rebound yesterday.

Some of the same factors which influenced trading yesterday were at work again today.

Risk aversion seems to be the order of the day and week.

The equity market has taken a pretty significant tumble today and broken through all manner of chart support in the 1050 area on the S&P. It has been a long profitable run for some this year (not your author) as stocks struggled from the abyss and it looks now as though some will ring the register before year end. The aphorism that no one ever got fired for taking a profit still rings true.

I think the much maligned folks at Goldman Sachs added to the negative tone with a downward revision to the GDP forecast for Q3 which will be released tomorrow. I believed GS reduced the forecast to 2.7 percent from 3.0 percent which I guess makes us vulnerable to an uptrade if it does print 3.0.

As an aside, participants will scour through the entrails of the Q3 GDP release to see what, if any, light it sheds on Q4. It will be interesting to see how much inventory rebuild added, as well as to what extent the one-time rush of cash for clunkers provided a boost.

As I noted in previous posts the corporate bond market has turned softer and for the first time in awhile has experienced generic spread widening.

Risk aversion is also evident in the behavior of the US dollar, which continues to strengthen versus the Euro.

I failed to mention that weak existing home sales data gave the bond bulls courage as the weak confidence number did yesterday.

Late in the day I have heard of dealer selling and hot money selling the belly of the curve. The backdrop is fine but it will be difficult to stage an unrestrained march to lower yields with the 7 year note auction impending tomorrow.

There is more supply on the horizon next week as the Treasury will proclaim the details of the November refunding on Wednesday. I spoke with an economist friend and that triumvirate of issuance will bring about $40 billion 3 year notes, an incredible $24 billion 10 year notes and a nice chunk of Long Bonds with about $16 billion in that bucket.

The yield on the 2 year note slipped 4 basis points to 0.94 percent. The yield on the 3 year note dropped 4 basis point also, to 1.45 percent. The yield on the 5 year note and the 7 year note and the 10 year note dropped 4 basis points to 2.33 percent, 2.99 percent, and 3.41 percent respectively. The yield on the Long Bond slipped 2 basis points to 4.25 percent.

The 2 year/5 year /30 year spread is 53 basis points. If I bring the new 5 year into the mix it is around 47 basis points.

The 10 year/30 year spread is 84 basis points.

The 2 year/10 year spread is 247 basis points.

Tomorrow is the 80th anniversary of the 1929 crash.

And for denizens and habitues of the grassy knoll section of the bond market, the Federal Reserve will finish its purchase of $300 billion Treasuries tomorrow. On the afternoon on which they announced it back in March, the 10 year note rallied 50 basis points from the mid 2.90s to the mid 2.40s.

The 10 year is trading at 3.40 percent today. How shall we judge the Federal Reserve on this one?