Across the Curve

Curvature

Thus far this day the belly of the Treasury curve has been the big winner. The Long Bond has been the relative loser of the day.

The 2year/5year /30 year spread is 45 basis points. It began the day at 36 basis points.

The 5 year/30 year spread is 189 basis points and is about 7 basis points steeper on the day.

The 10 year/30 year spread is 84 basis points and is 4 basis points wider today.

The 2year/5 year spread trades in the mid 140s. it has retreated from record wide levels of 160 basis points in mid June.

Current levels seem too wide if one believes the Janice Yellen mind dropping of yesterday that the funds rate might be zero for years. If that be the case then one should pile in to the 5 year note for the ride down the curve and buckets of carry.

The 2year/10 year spread is about 250 basis points. That spread in the moments prior to the employment report last month was 282 basis points. The report today abrogates any views formed with the release of the May report.

Release of that report sparked fears of Fed tightening sooner rather than late and motivated many investors and traders to jettison steepening positions.

My thought is that there truly is no chance that the Fed will tighten and that with supplyon the way next week the curve sshould steepen dramatically to underwrite supply.

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TIPS

Ten year TIPS are taking a thrashing. The breakeven inflation rate has declined to 166 basis points. It closed two days ago at 178 and at the height of the debacle in early June it was 205.

There are two reasons. Moments from now the treasury will announce a 10 year TIPS auction for Monday.

And there is a whiff of deflation in the labor report.

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More Miscellany

Mortgages are lagging swaps by about 6 ticks.

Volatility has declined. The three month 10 year ATM straddle is 652. It closed yesterday in the 670s.

Dealers report heavy  overseas buying of Treasuries early and now some selling as investors hedge against the supply of next week.

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Miscellany

There are no redeeming features in the labor report.

Average hourly earning demonstated no growth and the YOY gain is slipping.

Hours work actually declined and that will have economists revising down Q2 GDP forecasts. Analysts at Action  Economics have revised their Q2 forecast from -2.0 percent to -2.5.

Industrial production which is derived from this report probably fell about 1 percent in June.

There is no job growth and no income growth. Green shoots are wilting a bit.

Swap spreads are narrower across the curve. Two year spreads have narrowed 5 basis points to 39. Five year spreads, ten year spreads and 30 years are all tighter by 2 basis points at 40,21 1/2 and NEGATIVE 17 respcetively.

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Forward Rolls

As I mentioned in initial post of the day the Treasury will announce the details of the coupon offerings of next week at 1100AM New York time.

The three year will be a new issue and the roll from the current three year  into the WI will be about 7.5 basis points.

WI for those who do not know means “when issued”. The security trades on a yield basis until it is actually issued at auction next week. Once the auction process establishes a coupon rate for the bond the wonders of bond math transform that yield into a dollar price.

The 10 year note and the 30 year bond are reopenings of current issues. Consequently the only component of the roll there is the carry.

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Links

Manhattan real estate prices diving.

China on the dollar.

China on the dollar again.

FT on the long lasting effect of the financial calamity on European growth.

Professor Hamilton on the shape of the recovery

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Bond Market Open July 2 2009

Prices of Treasury coupon securities are posting minimal changes in overnight trading as participants await the monthly labor report.

The consensus anticipates that employers shed 365K jobs in June. The month of May was originally reported at -345K. Economists at UBS believe that we have entered that part of the economic cycle at which the revisions to prior months will reflect the turn in the economy. Consequently,they expect that last month’s figure will be revised to something slightly less onerous.

The unemployment rate will advance and the consensus expects it to hit 9.6 percent.

Today is actually Thursday and so it is also initial unemployment claims day. The consensus projects that the weekly figure will register a small decline to 615K from 627 K last week.

Today is also the day on which the Treasury will announce the details of the multiple coupon auctions planned for next week. The 10 year TIPS auction on Monday should total about $ 10 billion. The 3 year.10 year and 30 year auctions on Tuesday ,Wednesday and Thursday should raise about $ 65 billion.

The yield on the 2 year note increased a basis point to 1.05 percent. The yield on the 3 year note edged higher by 2 basis points to 1.56 percent. The yields on the 5 year note, the 7 year note and the 10 year note are unchanged at 2.51 percent, 3.20 percent and 3.54 percent,respectively. The yield on the 30 year bond increased a basis point to 4.34 percent.

Tomorrow the markets are closed to celebrate the 4th of July. Looking out the window here it appears to be a nice day in the New York metropolitan area. If the data do not provide a compelling reason to take risk, market participants will quickly vacate their seats for a weekend of fun and frolic in (hopefully ) the sand and sun.

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Bond Market Close July 1 2010

Prices of treasury coupon securities registered bifurcated results today with price gains in the front end and little change or outright losses elsewhere on the curve. The curve steepening which resulted stems from the supply and duration which shall strike the market next week. Supply trumps all other factors and traders are now busy anticipating that fiscal onslaught.( Larry Kudlow who I generally dislike and who was a shill for Bush Administration does have a great description when he refers to the profligacy of the current Administration as “fiscal nymphomania”.)

Some weakness in the entrails of the ISM report as well as the Yellen statement provided a fundamental backdrop for the trade.

I think there are two other stories which have influenced trading today.I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import. I believe that there is some buying of the front end to hedge uncertainty associated with that sad circumstance.

Separately, there was a story this morning about the IMF issuing bonds. That would be a negative for US bonds as issuance from that quarter would draw reserves from the US bond market at a time when they are sorely needed.

The yield on the 2 year note declined 7 basis points to 1.04 percent.The yield on the three year note tumbled 8 basis points to 1.54 percent. The yield on the 5 year note slipped 4 basis points to 2.51 percent. The yield on the seven year note is unchanged at 3.20 percent. The yield on the 10 year note edged higher by a basis point to 3.54 percent and the yield on the Long Bond increased by the same amount to 4.34 percent.

The 2year/10 year spread widened 8 basis points to 250 basis points.

The 2year/5year/30 year spread is at recent wides at 36 basis points.

The market awaits the labor report tomorrow. The consensus sees a decline in employment of 365K and a rise in the unemployment rate to 9.6 percent (from 9.4 percent currently).

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Agency Market

Agency spreads reversed the price action of yesterday when the long end buy back and index extension buying led to the out performance of the long end.

Two year spreads were 2 basis points to 3 basis points tighter. Five year sector paper is unchanged and 10 year sector paper is unchanged to a basis point tighter.

Investor flows were minimal as participants await the monthly labor lottery tomorrow morning.

One trader also noted that the two year agency sector benefited from the salutary effect of comments by Ms Yellen that the funds rate could remain at zero for years.

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Corporate Bonds

One syndicate desk operative and long time friend of the blog expects that the pace of issuance will diminish over the next several weeks. That will be a result of the blackout period surrounding earnings releases in July.

The same gentleman thought that the second half of July would bring heavy issuance. He thought the issuance would be plain vanilla investment grade and junk paper . He thought that there is s strong bid in each market.

I noted that the response to the Oracle deal had been less than festive. He replied that this holiday week with quarter end was a horrible backdrop for a deal of that size ($4.5 billion) and the deal was fully priced.

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