Bond Expert: Wednesday Outlook

Includes: BIV, SPTL, TIP, TLT
by: John Jansen

Prices of Treasury coupon securities are surging in overnight trading as equity market investors hastily and in disorderly fashion exit stocks for something safer.

China is leading the charge as its market declined more than 4 percent overnight. A Bloomberg story notes that the market in China has declined nearly 20 percent since August 4.

Markets in Europe have declined between 1.0 percent and 1.5 percent. The Nikkei in Japan declined a little less than one percent and the Hang Seng fell 1.7 percent. Trading in the futures market indicates that US markets will experience a decline of about 1.0 percent at the open.

Benchmark US Treasury issues have broken out of their recent range and are poised to test the low end of the yield range. I define that range as 4.00 percent to 3.25 percent on the 10 year note.

In the interest of full disclosure I was stopped out of my TLT long position yesterday. Timing is everything.

The yield on the 2 year note is through 1.00 percent for the first time in awhile and rests at 0.98 percent. (There was some tightness developing late yesterday in the repo market for that issue. Late yesterday it was trading at NEGATIVE 1.50 percent for today. And if you wished to borrow the issue to August 31 the repo rate had moved from NEGATIVE 20 cents to NEGATIVE 65 cents. That price action indicates that there are probably large short positions in the issue which need to be covered and the shorts are willing to pay up .)

The yield on the 3 year note declined 3 basis points to 1.50 percent. The yield on the 5 year note declined 8 basis points to 2.38 percent. The yield on the 7 year note slipped 8 basis points to 3.04 percent. The yield on the 30 year bond tumbled 6 basis points to 4.29 percent.

The 10 year/30 year spread has widened a tad to 85 basis points.

The 2 year/10 year spread narrowed 2 basis points to 246 basis points.

The belly of the curve has outperformed as the 2 year/5 year/30 year spread is 51 basis points after trading at 45 basis points late yesterday.

In China sales of domestic oil product dropped significantly in July.

In Germany PPI fell at the fastest pace in 60 years in July. PPI fell 7.8 percent YOY versus 4.8 percent in the prior month.

A similar fate befell the CPI in Canada as it registered a 0.9 percent YOY decline. That is its steepest decline since 1953 (when the world was a much simpler place).

There is a dearth of high profile economic data in the US today and the bond market will be inextricably married to the fate of the equity market.

There is also an Open Market Desk buyback today. The Federal Reserve is buying February 2020 through February 2026 paper.