Bond Expert: Wednesday Wrap

| About: iShares TIPS (TIP)

Prices of Treasury coupon securities are closing the day with virtually no change. The yield on the benchmark 2 year note is unchanged at 2.62 percent. The yield on the 5 year note slipped 1 basis point lower to 3.35 percent. Neither the 10 year note nor the 30 year bond has moved and they yield 4.04 percent and 4.63 percent respectively.The 2year/10 year spread is unchanged at 142 basis points.

The 2year/5 year/30 year butterfly has richened by 2 basis points to 55 basis points.

The market opened little changed from the previous close but with a firm tone as strength in bunds translated into robust fixed income markets elsewhere. (As an aside, with economic weakness manifesting itself in Europe there has been a pileup of traders betting that European fixed income markets will outperform the US as the sagging economy changes the tune of the ECB. In the last five days, 5 year bunds have outpaced the 5 year Treasury by 30 basis points. In the 10 year sector the outperformance has been 20 basis points.)

The release of the ADP report which showed employment gains soured the mood as fixed income markets sold off and equities roared.

The Treasury brought more gloom with the announcement of the refunding package which was about $2billion greater than anticipated. The announcement also carried the seeds of distant supply as it noted that the debt managers would revisit the topic in November.

Against that background, the new supply of 10 years and bonds would not be felt until February 2009. So those who shorted the market on that news came up empty handed.

Short covering developed by professionals as there is no pressing reason to be short ahead of the heavy spate of data which will be released the next few days.

In terms of retail activity it seems to have been limited, though I did have two traders speak of central bank selling in the 10-year sector.

Swap spreads moved tighter by a little over 2 basis points across the curve. The news that the Federal Reserve will offer an 84-day lending facility helped to flatten the Libor curve and drove swaps tighter.

Overnight Economic Data:

When trading opens on Thursday in the various venues there will be a smorgasbord of data to absorb and assimilate into a global view. Here are some of the key data points:

Australian Trade balance with import and export data.

Australian Retail sales data and Australian Retail Sales ex inflation

New Zealand Business Confidence.

Japanese Housing Starts and Japanese Construction Orders

Swiss Consumer Price Index

German Unemployment Rate

Eurozone CPI July

Eurozone Unemployment Rate June

Canada GDP May.