Bond Expert: Monday Wrap

Includes: SPTL, TIP
by: John Jansen

Prices of Treasury coupon securities tumbled sharply today as untrammeled animal spirits led a flight from the risk averse to that which is riskier and yieldier. The S&P 500 Index crossed back into four-digit territory and exemplifies the movement of investors over the last several weeks.

In the year and one-half that I have been reporting on the bond market here, my sources generally capture the price action in what they tell me regarding investor flows. That is not really the case today. Several traders at various dealer shops report much better buying by clients.

I can start with this: that there was universal notice of heavy purchases of the 2 year through 3 year sector by central banks. The preponderance of the buying was at the higher yield levels after the market broke down. One trader described the 1.19 percent level on 2 year notes as a “magnet” for central bank buying. To a lesser extent the central banks were also buyers of the 3 year note as it approached the 1.70 level.

In the long end of the market there was chunky money manager buying of the Long Bond as well as other Treasury paper in the 25 year through 30 year sector.

The yield on the 2 year note increased 7 basis points to 1.18 percent. The yield on the 3 year note increased 11 basis points to 1.70 percent. The yield on the 5 year note increased 15 basis points to 2.67 percent. The yield on the 7 year note climbed 16 basis points to 3.30 percent. The yield on the 10 year note soared 15 basis points to 3.63 percent. The yield on the Long Bond climbed higher by 11 1basis points to 4.41 percent.

The 2 year/10 year spread widened 8 basis points to 245 basis points.

The 10 year/30 year spread narrowed 3 basis points to 78 basis points.

The 2 year/5 year/30 year spread is closing at 25 basis points.

In the world of TIPS bonds today the breakeven spread on 10 year TIPS widened to 188 basis points to 185 basis points. The spread in the 30 year sector narrowed 2 basis points to 220 basis points. That spread narrowing would be consistent with my earlier report of chunky buying of the nominal rate bonds.