Bond Expert: Friday Outlook

Includes: BAC, BIV, C, GS, JPM, MS, SPTL, WFC
by: John Jansen

Prices of Treasury coupon securities have rebounded following the bout of profit taking which plagued the market yesterday. Investors experienced a bit of an epiphany and concluded that the size and scope of the FOMC intervention in the bond market would be supportive of bond prices, at least in the near term.

The yield on the 2 year note slipped 4 basis points to 0.82 percent. The yield on the 3 year note also edged lower by 4 basis point and it rests at 1.17 percent. The yield on the 5 year note has declined 5 basis points to 1.60 percent. The yield on the 10 year note also declined 5 basis points and it yields 2.55 percent. The Long Bond is a laggard as its yield declined just 3 basis points to 3.60 percent.

The 2 year/10 year spread is a basis point flatter at 173 basis points.

The 2 year/5 year/30 year spread is about a basis point richer at 122 basis points. One trader with whom I speak thinks that the combination of Treasury note purchases and mortgage bond purchases will result in this spread reaching 150 basis points.

As I noted in my closing post yesterday, the Treasury announced $98 billion of new supply yesterday for auction next week. Analysts David Ader and Ian Lyngren of RBS Greenwich Capital calculate that the supply next week is equivalent to $46.2 billion 10 year notes. That is an increase from the prior month when this batch of supply equated to $43.6 billion 10 year notes.

The same analysts also did some nifty work and placed the $300 billion Federal Reserve purchases in some context. The analysts note that the purchases are useful but at the margins after the huge increase in auction size. Here is the excerpt:

For a little context however, we note that the outstanding in the 2-year to 10-year sector is just under $2.2 trillion, with an average coupon of about 4% and an average maturity of 5-years. With a 4.48 modified duration assumption, that gets us to a weekly Treasury schedule of $12.5 bn nominal and $6.5 bn in 10-year equivalents. That’s the very long way of saying the Fed’s looming coupon passes are enough to offset the growing auctions — but only growth from the newly established (extremely high) levels.

The only economic data on Friday are the Bureau of Labor Statistics’s mass layoffs release.

The dollar is posting gains against the yen and Euro this morning. One analyst notes that $1.3740 is the 3 year moving average for the Euro. A break of that level should push the Euro to $1.40.


5 yr Senior Bank CDS: BAC 300/310 (+5), CITI 525/535 (unchanged), JPM 155/165 (+5), WFC 208/218 (-2)

- 5yr Snr Broker CDS: GS 252/262 (unch), MS 355/365 (+2)

- CDS Index: IG11 231/232.5 (+2)