Bond Expert: Tuesday Wrap

Includes: BIV, IEF, IEI, TLO
by: John Jansen

Prices of Treasury coupon securities put in a bifurcated performance today as the short end of the curve barely budged while the long end suffered sharp losses.

The 2 year/10 year spread widened 6 basis points today to 256 basis points.

The 10 year/30 year spread leaked wider by 2 basis points.

I generally do not quote the 2 year/30 year spread but that widened by 8 basis points to 343 basis points.

Why did the curve steepen so significantly this day? Once again it is difficult to isolate a single factor, but it is a response to a collection of stimuli.

I think the driving force is a late belief that the FOMC will not alter enough of the wording of its post meeting statement tomorrow to instill a belief that a less amicable Fed is at hand and as a consequence the front end is still safe. Or even bullet proof.

I have heard of some holders of flattening positions who have decided to toss those positions ahead of the FOMC and who will revisit the trade when the outcome of the meeting is crystal clear.

Supply is also a contributing factor. The expectation is that the duration dump by the Treasury which will be announced tomorrow will include $ 25 billion 10 year notes and $15 billion Long Bonds. That is a lot of risk to underwrite and dealers are setting up for that supply as we speak.

Another factor is supply in other markets. I did hear that there was a dollop of Build America Bonds today and that weighed on sentiment in the long end.

The yield on the 2 year note is unchanged at 0.91 basis points. The yield on the 3 year note climbed a basis point to 1.43 percent. The yield on the 5 year note increased 3 basis points to 2.36 percent. As we move out to the 7 year note it starts to get a little rocky as the yield on the instrument jumped 5 basis points to 3.05 percent. The yield on the 10 year note surged 6 basis points to 3.47 percent. The Long Bond traded as if contact with it would transmit the swine flu or some social disease as its yield catapulted 8 basis points to 4.34 percent.

Tomorrow will bring the announcement of the quarterly refunding. The conventional wisdom expects $40 billion 3 year notes, $25 billion 10 year notes and $15 billion 30 year bonds.

Swap spreads were mixed. Two year spreads widened 3 basis points to 37 1/2. Five year spreads widened 2 basis points (also) to 37 1/2. Ten year spreads were unchanged at 18 and 30 year spreads were unchanged at NEGATIVE 8