Bond Expert: Wednesday Outlook

Includes: PST, SPTL
by: John Jansen

Prices of Treasury coupon securities are posting, on balance, marginal gains following the shellacking which they suffered yesterday. The most aggrieved instrument from yesterday, the Long Bond, is, in fact, unchanged. So the gains have a bit of a dead cat bounce about them

The yield on the 2 year note is lower by 2 basis points at 0.93 percent.The yield on the 3 year note has also edged lower by 2 basis points to 1.25 percent. The yield on the 5 year note has declined 2 basis points to 1.95 percent. The yield on the 10 year note has declined a basis point to 3.00 percent and the yield on the Long Bond is unchanged at 3.95 percent.

The 2 year/5 year/30 year spread is 98 basis points. That is several basis points narrower than where I closed it, but most of that narrowing is the inclusion of the roll on the new 5 year note.

The 2 year/10 year spread is 207 basis points.

Today is a day replete with news. It is chock full of data points.

The data begins with the first report on Q1 GDP. If the dismal scientists are correct, the recession was still in full flower and the economy contracted at an annualized rate of about 4.5 percent in Q1. There should be some “good news” in the report. Economists believe that real personal consumption, which contracted at a rate of 4.3 percent in Q4, probably posted a gain of about 1 percent in Q1.

Economists at UBS believe that much of the Q4 GDP decline stemmed from inventory liquidation. They believe that inventory liquidation contributed about 2.5 percent of the decline in Q1 GDP. That is a subtraction. So if one assumes some stability in demand, inventory will be replenished in the future and be a positive force for growth.

The Treasury will release the details of the refunding at 900AM New York time. Most estimates are for something around $70 billion. Economists at UBS see $36 billion 3 year notes, $22 billion 10 year notes and $14 billion Long Bonds.

The UBS economists noted an interesting factoid which highlights the explosive growth in the borrowing needs of the Treasury. At the refunding in August of 2008 the Treasury borrowed $27 billion. In November 2008 they raised $55 billion and in February 2009 the package totaled $67 billion.It has increased by a factor of 2.5 in less than a year.

Regarding changes in the financing cycle I will reiterate what I said late yesterday and note that there will be no 50 year bond. I think they will choose to sell a Long Bond in each month of the year which is quite an innovation in itself.

The FOMC meets today, too, and will announce the results of its deliberations at 215PM New York time. I think that the Committee will genuflect in the direction of the signs of stability which have crept into the economy. In that regard the statement should be more upbeat than the previous one.

I think that the improvement in the economy and in the financial markets precludes any extension (increase) in QE. I see no reason for the group to fire new bullets when conditions (albeit slightly) are improving.

I think that they will reiterate that the funds rate will remain low for an extended period and that the risks of weakness outweigh chances of growth. They will also note their collective concern about too low a rate of inflation.

Amongst all the other happenings on this day the Treasury will auction $ 26 billion 7 year notes at 100PM New York time.

My position

Yesterday I bought 1500 PST at an average price of $53.43. The yield on the 10 year note at the time was 2.92 percent. I sold 1000 shares before the close at prices between $ 54.07 and $ 54.09. The yield on the 10 year was around 3.01 when I sold.

I am still long 500 shares.

I covered because I think much of that back up today related to the swirling rumor of a 50 year issue. As I have stated, I doubt that they will announce such an issue and I think that failure to announce it will provide space for a bit of a relief rally.

So I chose to reduce my risk.