Bond Expert: Wednesday Outlook

by: John Jansen

Prices of Treasury coupon securities have posted modest declines in overseas trading. The yield on the benchmark 2 year note has increased by 1 basis point to 2.39 percent. The yield on the 5 year note has increased by 3 basis points to 3.18 percent. The yield on the 10 year note has moved 2 basis points higher to 3.92 percent and the yield on the Long Bond is 1 basis point higher at 4.65 percent. The 2 year/10 year spread rests at 153 basis points.

Dealers report active flow in the overnight session.There was bank buying of the 10 year sector and central bank buying of short agencies. Hedge funds established curve steepening positions and there were other investors buying 10 year US versus 10 year Germany.

The Treasury refunding process begins in earnest today as the dealer community will risk its literally scarce capital when it bids on $15billion 10 year notes at 1:00PM New York time.The issue has cheapened dramatically versus the front end of the curve and on an outright basis carries its highest yield in 3 months.The issue will also benefit from a widely disseminated seasonality argument which holds that purchases in May are generally quite profitable. In the last two years, yields peaked in June .

Federal Reserve Bank of Kansas City President Hoenig stirred the waters overnight when he raised the spectre of Federal Reserve rate hikes to combat an embedded inflationary psychology which he described as rivalling the sentiments that prevailed in the 1970s. I do not agree with that, but he sits at the table when policy makers chew on that topic.