Bond Expert: Wednesday Outlook

Includes: IEF, IEI, SHY, TLH, TLT
by: John Jansen

Prices of Treasury coupon securities have maintained the strong tone which prevailed for much of yesterday’s session and are slightly better bid as trading shifts across the big pond to the States. Equity markets around the globe have experienced weakness and pre market trading indicated that shares will open soft when trading begins in the US in several hours.

I posted a brief note on weakness in Emerging Market equities and that in conjunction with a strengthening dollar seems to send a signal that risk reduction is in vogue again today.

The yield on the 2 year note is lower by a basis point and it rests at 0.97. The market has rolled to the new issue which received an enthusiastic reception from bidders yesterday. For the record, the forward roll is 6 basis points and that makes the issue cheaper and will wreak some havoc with spreads this morning.

The yield on the 3 year note has slipped 2 basis points to 1.47 percent. The yield on the 5 year note declined 2 basis points to 2.35 percent. The yield on the 7 year note dropped a solitary basis point to 3.02 percent. The yield on the 10 year note declined a basis point to 3.44 percent and the yield on the Long Bond slipped a basis point to 4.27 percent.

The 2 year /10 year spread is 247 basis points.

The 10 year /30 year spread is 83 basis points.

The 2 year/5 year/30 year spread is 54 basis points, if I use the new 2 year note only. The 5 year roll is 4 basis points and if I employ that in the calculation which is what we will do tomorrow morning the spread is 46 basis points.

The focal point of today will be two fold: Traders will focus on the 5 year note auction and its $41 billion of supply and they will do that with one eye carefully cast on the price action in the stock market.

I would expect that the Treasury market will be joined at the hip to the price action in equities. If equities remain weakish there will be buyers of bonds. I am not a technician but the market has rejected higher yields and reentered the 3.50 percent to 3.30 percent area which had prevailed for so long.