Bond Expert: Thursday Outlook

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

Prices of Treasury coupon securities are posting modest (very) losses in overnight trading as some of the fear and angst which dominated trading yesterday fades today.

Equity markets around the globe have posted losses but as one follows the sun the losses diminish and early indications are that the US market will open with small gains.

Supply, in my humble opinion, is a bit of a problem today. The market has enjoyed a nice rebound after its recent race to higher yields but the market’s mettle and appetite for risk will receive a stern test today with the auction of a record $31 billion 7 year notes. The auction today is the final act in a week in which the Treasury sold $123 billion coupons.

I think that shorts have (mostly) covered and there will not be the same sense of urgency today as there was earlier in the week. I would expect this one to have a larger tail than the insignificant tail which the 5 year experienced yesterday.

As I noted yesterday, today will be the last day in which the Open Market Desk purchases Treasuries as part of the QE program. I have never (and still do not) subscribed to any of the flimsy conspiracy theories which have virally circulated on the internet but it is an incontrovertible supply and demand fact that the end of QE removes a very large buyer. That is troubling with the Treasury floating as much debt as its profligate financing needs require.

I do not have extensive historical databases here at Across the Curve Global HQ but it seems to me that the 7 year note has been an exceptional beneficiary of the largesse of the Open Market Desk and its purchases.

I just think that this will be an interesting test of bidding appetites as dealers buy this bond knowing that there is no deus ex machina via the Open Market Desk to rescue them if the market turns south again.

We also have data on Q3 GDP today as well as initial claims.

I believe the GDP consensus is for an increase of 3.2 percent. Savvy market participants will be examining the report to understand its implications for future economic growth. How much of the growth in the period is driven by the restocking of depleted inventories? How much of a factor was the cash for clunkers program? How much was driven by consumption?

Initial claims are generally expected to post a small decline into the 520s.

The yield on the 2 year note has climbed 2 basis points to 0.95 percent. The yield on the 3 year note has increased 2 basis points to 1.46 percent. The yield on the 5 year note has climbed a basis point to 2.38 percent. The yield on the 7 year note has edged higher by 2 basis points to 3.01 percent. The yield on the 10 year note is a basis point higher at 3.43 percent and the same can be said for the yield on the Long Bond which rests at 4.27 percent.

The 10 year/30 year spread is unchanged at 84 basis points.

The 2 year/10 year spread is a basis point narrower at 248 basis points.

The 2 year/5 year/30 year spread is 46 basis points.