Good morning. Bond markets were quiescent over night and the US Treasury marketing is manifesting very little price change. Dealers report mixed client flows in the overnight session. Asian clients sold 2 year through 5 year paper while real money was a better buyer of 10 year paper. In the very long end an aggregation of reports from several dealers indicates mixed flows in that sector.
This week week the wait for the FOMC Godot will dominate trading. I can not imagine that they will do anything but last month market participants uniformly thought that they could not wallow in inaction and look at how they caught the market off guard. Anyway, it would be truly shocking if they announced a taper this time. I think that they will forever rue the day that they did not announce even a token $5 billion reduction in purchases. They could have couched the action in some phraseology acknowledging the long journey on which they were embarking and they would be ever vigilant regarding the momentum of the economy.
In the Treasury market the risk is in the belly of the curve as traders and investors have plowed back into that sector and have reloaded the carry trade which fears of taper had led them to regurgitate in the May/July period. So if there is even a hint that that Fed might taper in 2013 that sector and associated spread product is at great risk.
As an example of the extent of the recovery in the belly you can observe that the 2 year/5 year spread traded as wide as 134 basis points in early September when the market was at its worst levels (10s traded 3 percent then). That spread is now bank to 97 basis points as fear of tapering has receded rapidly.