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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.

Source: Bond Expert: Friday Outlook