Bond Expert: Thursday Outlook

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

Prices of Treasury coupon securities have posted modest gains in overnight trading and while the curve remains near all-time steep levels, that action abated overnight. In fact, in the overnight session the 5 year note was the superstar and outperformed its brethren.

The yield on the 2 year note declined 2 basis points to 0.87 percent. The yield on the 3 year note fell 3 basis points to 1.40 percent. The aforementioned 5 year note saw its yield decline 4 basis points to 3.33 percent. The 7 year note also experienced a yield decline of 4 basis points and rests at 3.04 percent as the day begins. The yield on the 10 year note shed 3 basis points and resides at 3.49 percent. The yield on the Long Bond dropped 2 basis points to 4.38 percent.

The 10 year/30 year spread actually steepened and is at 89 basis points. That is wide for recent trading. To place that in some perspective, the narrow over the last 6 months has been in the low 70s and the spread had a cup of coffee north of 100 in May when the market treated a 30 year bond auction with disrespect.

The 2 year/10 year spread is a basis point narrower at 262 basis points.

The 2 year/5 year/30 year spread is at a near term wide and reflects the inordinate cheapening of the Long Bond. It trades at about 59 basis points this morning.

David Ader at CRT reports that it was an active trading session overnight and that 10 year yields above 3.50 percent attracted Asian central bank buying in the 5 year through 10 year sector. The same gentleman reports speculative buyers of 5s and end user purchases of 7 year sector paper.

This morning participants will receive information on Productivity and Unit Labor Costs which should be friendly to the renter class and not so friendly if you toil for wages.

There is also the weekly initial claims report which prognosticators, pundits and poets anticipate will post a parsimonious decline.

I think that the market will meander about in a narrow range today as we await the monthly labor data tomorrow. For now buyers still emerge with the 10 year note in the mid 3.50s. I am not sure what the next trade is.

If you held a gun to my head and forced me to trade, I would hold a small amount of short-term paper and would add to it tomorrow after the data prints. If nothing else I would expect 2 year/10 year and 10 year/30 year to steepen into the supply.

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