Bond Expert: Tuesday Wrap

Includes: BIV, TLO
by: John Jansen

Prices of treasury coupon securities did a rapid turnaround today and wiped out a chunky portion of the market's recent losses. There are a myriad of reasons for the about face. I offer some without any ranking of their relative importance.

The market had sold off significantly. If we use everyone’s favorite metric, the 10 year note, that issue had traded at a low yield on 3.10 percent early in the month following the weakish labor data. The 3.55 ish level represented about a 50 percent retracement of the summer rally off the 4 percent yield high.

US bonds had gotten cheap to Europe. Last Thursday 5 year US was 16 basis points rich to Europe. Just prior to the auction the issue was flat and following the bullish result of the auction is now 4 basis points rich to 5 year Europe. The range has been from the US being 20 rich to about 5 basis points cheap to Europe.

The wobbly state of the equity market contributed to the strength in the Treasury market, too.

Today was a day of literary allusions in the bond market and Bill Gross leaped into that game when he published his monthly piece and quoted from an Elizabethan Bill, Bill Shakespeare. The bond market point here is that Mr. Gross declared that the risk taking orgy is nearing an end. I believe that his piece resonated with some investors and traders and increased demand for benchmark Treasury paper.

The very successful auction spurred demand, too. Dealers won a very low percentage of what they bid for and I am certain that there were some shorts scurrying to cover post the auction.

Finally, the confidence data paints a portrait of an angst filled consumer. Spending drives US GDP. A realistic reading of the facts would lead one to believe that the Christmas shopping season will be disappointing.

Against that bullish backdrop, yields on fixed income instruments dropped.

The yield on the 2 year note declined 10 basis points to 0.93 percent. The yield on the 3 year note declined 11 basis points to 1.49 percent. The yield on the 5 year note tumbled 11 basis points to 2.37 percent. The 7 year was the superstar of the day as its yield declined by a precipitous 13 basis points. The yield on the 10 year note dropped 10 basis points to 3.45 percent. The 30 year bond was the worst performer on the list as its yield fell 9 basis points to 4.28 percent

The 2 year/10 year spread is a basis point wider at 252 basis points.

The 10 year/30 year spread widened to 83 basis points.

The belly of the curve was the beneficiary of the salutary mood amongst investors. The 2 year/5 year/30 year spread began the day at 40 basis points and trades now at 47 basis points.

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