Bond Expert: Friday Outlook

Prices of Treasury coupon securities are registering very small changes in overnight trading and those small changes have reversed some of the curve steepening march of recent days. So in the overnight, longer maturities have gained ground while shorter maturity issues have languished. Market participants are awaiting the monthly labor data and I think the price action indicates position squaring before the data release at 830AM New York time.

The yield on the 2 year note increased 2 basis points to 0.89 percent. The yield on the 3 year note edged higher by a basis point to 1.41 percent. The 5 year note was a bit of an inflection point as it was unchanged and yields 2.34 percent. The yield on the 7 year note declined a basis point to 3.04 percent. The yield on the 10 year note is lower by a basis point at 3.51 percent and the yield on the Long Bond edged lower by a basis point to 4.39 percent.

The 10 year/30 year spread is 88 basis points.

The 2 year/10 year spread is 262 basis points. I believe while I was at Across the Curve Global HQ yesterday it had traded as wide as 266 basis points.

The 2 year/5 year/30 year spread is 60 basis points. That is at the rich end of the recent range and indicates the cheapening of the Long Bond. Another way to say it is that the 5 year/30 year leg has steepened more than the 2 year/5 year leg.

The focus of the day is the labor report. The consensus looks for a small uptick in the rate and for corporations to have declared about 175K workers redundant. (Sounds much nicer than “outta work”.)

The range on the 10 year note has been 3.55 ish to 3.40 lately with very strong resistance and sell pressure at the 3.30 area. One technican I read suggested that there is solid support around 3.60 percent. I would use 3.60 and 3.40 as the trading range and the first time at either level I would fade that move.

If you held the proverbial gun to my head and forced me to predict which way we break if the range does not hold I would look for higher yields in the short term. The extent of the recent curve steepening is troubling, and while much of it is a result of the auction supply, and the weakness in the Long Bond (and 10 year note) says to me that investors are rather skeptical about owning that paper.

If we were to trade through 3 .60 on the 10 year I would not tarry for long before exiting long positions.

Comments

[Tony Petroski:]

"The focus of the day is the labor report. The consensus looks for a small uptick in the rate and for corporations to have declared about 175K workers redundant. (Sounds much nicer than “outta work”.)"

Well-trained managers know how to handle this one: "The truth is that opportunities are opening up for you elsewhere and we don't want to get in your way. Place your things in this box and security will accompany you to the door. Send me an E-mail to let me know how you're doing."

Nov 06 08:23 AM

[Mad Hedge F...:]

vgyb Ouch! Another 190,000 jobs went down the crapper in October, taking unemployment rate to a new 27 year high of 10.2%. Add in discouraged job seekers, and that puts the jobless rate at gut churning 17.5%, and over 20% in California. Along with yesterday’s stunning, gob smacking 9.5% increase in Q3 productivity, the figures point a giant arc spotlight on what is really happening in the economy. Companies are still firing workers en mass to boost profits. After getting blood from a stone they are returning to the same rock for one more drop. I guess if I fire myself, the profitability of my business would go through the roof too, and maybe even my stock would rise. At least then I would then be rid of my oldest, most expensive but least productive employee, who is the worst to get along with, max’s out his sick and vacation days, and wears the same clothes to work every day, even when there lipstick on the collar. But then who would write this daily letter? Maybe Cecelia, my cleaning lady, would do it. She’s cheap. This explains why when you go into Office Depot these days, there is only one minimum waged employee standing at the cash register, the hours on the phone I have to wait to get technical support from Dell, and the endless unmovable lines at Citibank. America’s service economy has become all about denying service to customers. The scary thing is, with companies firing their way to prosperity, what happens when we get another dip? My theory is that the US has entered an era of chronically high employment that is never going away, no matter what the government does. Goodbye USA, hello Germany!

Nov 06 01:33 PM

[Tony Petroski:]

The madman weighs in here too.

He's the Dos Equis man of finance.

Normally a name-dropper, he's instead become a (help me here...the opposite of name-dropper...humble?) rubber of elbows. Cecelia the cleaning lady could not write this letter. It takes real talent to produce copy like this day in and day out.

Stay thirsty my friend.

Nov 06 04:42 PM