Bond Expert: Tuesday Wrap

Prices of treasury coupon securities were all over the ballpark today and waxed and waned with the vacillating fortunes of the stock market. Stocks were weak early following weakness in Europe and subsequently recovered again after the stronger than expected ISM report, which showed manufacturing on the (barely) expansive side. Stocks then plumbed new depths as Ford Motor (F)posted shoddy sales in June but then rebounded following a weak (but better than expected) report from General Motors (GM). I think it is important to keep in mind that notwithstanding expectations, GM sales did decline by 19 percent.

I am not certain of the final number (there is no research department at acrossthecurve.com) but the last estimate I had on domestic car sales was in the mid 14 millions. The fellow who gave me that averred that the average monthly figure for this decade is 16.8million.

So the yield on the benchmark 2 year note has climbed by 2 basis points to 2.63 percent and the yield on the 5 year note is unchanged at 3.33 percent. The yield on the benchmark 10 year note is higher by 2 basis points and it sits at 3.99 percent. The yield on the Long Bond is also higher by 2 basis points and it is finishing the session at 4.54 percent.

The 2year/10 year spread is unchanged at 136 basis points.

The 2year/5year/30 year spread is 51 basis points and traded as rich as 55 at the when stocks were at their worst levels.

There are several factors which account for the exalted status of the 5 year note today. The trade is mostly directional and with the market mostly grinding higher the 5 year point should be a beneficiary. With rates dropping there is also a bit of a convexity bid. Until the late recovery in stocks there was a certain element of flight to quality and that lent some support to the issue. There is a bit of a repo bid for the issue as it is 1.25 bid to the end of the month. Additionally, there was heavy selling of long paper as traders unwound long US/ short Europe trades. Some of those funds diverted themselves to Canada also.

Corporate bonds as measured by the IG 10 are closing about 3 basis points wider on the day. There was very little cash trading and the issuance pipeline has dried up.

Comments

[Ames Tiedeman]

How can bonds keep going up with inflation screaming? Bonds should fall and the yields should be driven up. The bond market has it all wrong.

[jlounsbury59]

The seemingly incongruous behavior of the bond market is being influenced by four factors: (1) There is no US wage inflation; (2) The rate of money growth is currently near zero; (3) The deflation of the credit bubble, ie, much lower velocity of money; and (4) the deflation in a major asset - housing.

Obviously, the bond market is offsetting commodity inflation with the above disinflation and deflationary factors.