Bond Expert: Monday Outlook

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Includes: BIV, SPTL, TIP
by: John Jansen

Prices of Treasury coupon securities have surged in overnight trading and the 10 year note yield has hit a new cycle low. Weak equity markets and concerns regarding the strength of any global recovery have motivated trading.

The yield on the 2 year note is 3 basis points lower at 0.87 percent. The yield on the 3 year note has declined 5 basis points to 1.35 percent. The yield on the 5 year note at 2.16 percent is 5 basis points lower. The yield on the 7 year note has declined 4 basis points to 2.85 percent. The yield on the 10 year note has slumped 5 basis points to 3.26 percent. The yield on the Long Bond edged lower by 3 basis points to 4.17 percent.

The 2 year/10 year spread is 239 basis points.

The 2 year/5 year/30 year spread is 74 basis points. in early June at the market’s nadir, that spread traded in single digits. The move to the current level reflects the tremendous outperformance of the 5 year note relative to the 2 year note and the Long Bond. There should be some resistance as the spread edges toward 90 basis points. Before the market cratered in May and June, the spread regularly supported at 90 basis points.

On the day in March that the Federal Reserve announced that it would buy Treasuries, the spread traded at 145 basis points.

The 10 year/30 year spread continues to widen and is at 91 basis points. That spread traded at 107 basis points in May. So at current levels, the spread is about at mid range with the recent narrow being about 72 basis points.

There is a dearth of economic data today. There are no major indicators scheduled in the US today.

The rest of the week is data heavy, however. Participants will receive reports on PPI and CPI and IP and capacity utilization. There is a retail sales report as well as reports on manufacturing activity in the Philadelphia Federal Reserve District and the New York region.

Overseas there was also very little news. There is political turmoil in Japan as the ruling party will call for elections in late August.

The Swiss are having a whiff of inflation. PPI in that country suffered its steepest decline since 1964 as it fell 3.4 percent YOY in June.

There is no supply from the Treasury this week.

The Federal Reserve will purchase Treasury securities tomorrow with maturities between May 2011 and April 2012.

On Thursday the Open Market Desk will buy TIPS.

The 10 year note is now within shouting distance of 3.22 percent. That level represents a 50 percent retracement of the 2.45 percent to 4.00 percent June high yield and the March low yield.