Bond Expert: Wednesday Outlook

Includes: BIV, MET, SPTL
by: John Jansen

Prices of Treasury coupon securities are registering marginal mixed changes in overnight trading. That is a somewhat disappointing outcome as I thought that the highest yields in six months would have elicited some measure of buying. Instead, prices have barely budged from the extreme levels attained in late trading yesterday. It is also a bit of evidence that the gargantuan offerings from the Treasury are so frequent that investors feel no pressure to hurry their purchases as there is always another iteration of supply just around the corner.

Today the Treasury will sell $35 billion 5 year notes. The issue is quite cheap to the 2 year note at + 136 basis points. It is also cheap to the 2 year note and the 30 year note on the butterfly as that spread is 82 basis points this morning.

As of this early hour I would posit that as cheap as the 5 year note appears now, it will likely cheapen into the 100PM bidding deadline. I do not mean to be redundant, but if one misses this auction there is a $26 billion batch of 7 year notes tomorrow. So there is no rush.

It is a light day on the economic front today. Existing home sales for April are expected at 4.66 million versus 4.57 in March.

The FHFA home price index (FHFA is the alphabet soup formerly known as OFHEO) is expected to rise 0.2 in March after posting unexpectedly robust gains of 1.0 percent in January and 0.7 percent in February.

The yield on the shiny new 2 year note is 0.95 percent. The yield on the 3 year note is 1.45 percent. The yield on the 5 year note has edged higher by a basis point to 2.31 percent. The yield on the 10 year note has slipped a basis point to 3.54 percent and the yield on the Long Bond has slipped a basis point to 4.49 percent.

The 10 year/30 year spread is 95 basis points. The auction of 30 year bonds earlier this month sent that spread to 100 basis points. In this environment it is inconceivable to me that the reopened 30 year bond will auction at a spread of less than 100 basis points to the 10 year note.

The Federal Reserve will be purchasing the May 2012 through August 2018 sector today.

Metropolitan Life (NYSE:MET) sold a benchmark seven year bond yesterday at T+ 375. I have seen an early quote of 370/360.

Libor: Three month Libor has set a basis point higher at 0.67375 versus 0.66375 yesterday.