Bond Expert: Monday Outlook

Includes: IEF, TBT, TIP, TLT
by: John Jansen

Prices of Treasury coupon securities have posted minimal losses in overnight trading. There was very little economic data released overnight and it is a light data day stateside, too.

There are two dominant themes in trading today. The first theme is supply as the Treasury begins a four day period in which it issues more debt than has ever been issued in such a short period of time. In total the Treasury will issue $123 billion this week.

The first auction today is the 5 Year TIPS. There are just $7 billion of them and there has been solid demand for inflation protection recently. Analysts expect strong demand from central banks as well as money managers. For those who crave liquidity, this will be the last TIPS auction of 2009 and if one wished to buy a large block covertly, then this is the last chance to operate stealthily.

Later in the week, Mr Geithner and his minions will offer $44 billion 2 year notes, $41 billion 5 year notes and $31 billion 7 year notes.

The market has backed up considerably (the 10 year is off 40 basis points from recent low yields) and sits at key support with the 10 year note at 3.50 percent level.

I think that the market will plumb new high yields this week. We will drown in a sea of Treasury supply. At the margin dealer bidding will be more cautious as the invisible hand of the Federal Reserve will leave the scene as Federal Reserve purchases of Treasury securities come to a close this week.

In addition, talk of a change in the language of FOMC statement is rampant and fears of a less accommodative policy will diminish interest.

The yield on the 2 year note has climbed a basis point to 1.02 percent. The yield on the 3 year note is unchanged at 1.57 percent. The yield on the 5 year note has climbed a basis point to 2.46 percent. The yield on the 7 year note has edged higher by a basis point to 3.11 percent. The yield on the 10 year note has increased a solitary basis points and rests at 3.50 percent. The yield on the Long Bond has climbed a basis point to 4.30 percent.

The 2 year/10 year spread is 248 basis points.

The 10 year/30 year spread is 80 basis points.

The 2 year/5 year/30 year spread is 40 basis points. The belly which will receive the brunt of the supply this week is under ferocious pressure.