Bond Expert: Tuesday Wrap

Prices of treasury coupon securities posted disparate results today. It was a tale of two markets. The yield on the 2 year note tumbled 6 basis points to 2.39 percent and the yield on the 5 year note dropped 6 basis points also to 3.11. It gets a little less festive in the longer maturities as the yield on the 10 year fell one just basis point to 3.85 percent. The Long bond traded as if it suffered from some dread social disease and the yield on that fabled and storied instrument jumped 3 basis points.

Many market participants have cast their verdict on the Bernanke testimony and the judgment is that it was decidedly dovish and lacked teeth regarding inflation. I personally think the bigger problem is keeping the system afloat but if I give the inflation hawks their due, headline PPI has been up 1.8 percent in June and 1.4 percent in May. I wonder if the Weimar Republic measured inflation at the core level. That level of inflation can not be comforting to someone holding a 30 year bond with a yield to maturity of less than 4.50 percent.

The currency market rejected the dollar also as the Euro breached the $1.60 level at one point (it has subsequently recovered ) and the yen trades with a 104 handle after beginning the day with 106 handle.

It was a pretty active day in the Treasury market and swaps. There was a big buyer of the 5 year sector and robust receiving in 10 year swaps. There was some speculative paying in 5 year swaps. One trader observed end user buying of zeroes in the long end. The same trader observed outright liquidation of some off the run bonds and the establishment of curve steepening positions.

Swap spreads were wider by a basis point in the 2 year sector and about ½ basis point tighter in 5 years and 10 years.