Bond Expert: Monday Outlook

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

Prices of Treasury coupon securities are posting small (very small) mixed changes in overnight trading. Benchmark securities are either unchanged or a tad lower in price (and with the inverse relationship between price and yield constant, yields are a tad higher, unless somehow Goldman Sachs (NYSE:GS) can change that mathematical relationship).

The overnight news lacked a real catalyst for violent price change. The only noteworthy item is a healthy jump in German Industrial Production which rose 2.9 percent in September versus 1.8 percent in August. That leaves IP in that country declining at a YOY pace of -12.9 percent September versus -16.5 percent in August.

Equity markets around the globe are posting robust gains and the dollar is cratering.

There is no data in the States today and the focus of trading will be the supply tsunami which begins today with the auction of $40 billion 3 year notes. On the heels of that auction will come $25 billion worth of 10 year notes tomorrow and then $16 billion in 30 year bonds on Thursday. (The bond market will close on Wednesday November 11 to observe Veterans Day.)

The yield on the 2 year note has increased a basis point to 0.85 percent. The yield on the 3 year note is unchanged at 1.36 percent. The yield on the 5 year note has not budged either and rests at 2.30 percent. The yield on the 7 year note has increased a basis point to 3.01 percent. The yield on the 10 year note and Long Bond have increased a basis point to 3.51 percent and 4.41 percent, respectively.

The 2 year/10 year spread is unchanged at 266 basis points.

The 10 year/30 year spread is unchanged at 90 basis points.

The belly of the curve as measured by the 2 year/5 year/30 year spread is at 66 basis points. That reflects the significant steepening of the 5 year/30 year of that lepidopterological transaction.

The main focus of the market today will be the 3 year note auction as dealers risk their scarce capital at 1:00 PM New York time. I suspect that auction will be well received as there are too many dollars chasing too few bonds in the front end of the market, of late. And if the purchase is an error, dealers can easily hedge up by spanking the 10 year and the 30 year which my close personal friends at the Treasury will off-load later in the week.

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