Prices of Treasury coupon securities are registering very small changes in overnight trading amidst very light client activity. In reports I have observed this morning dealers have reported real money buying in off the run Long Bonds and fast money short covering in the 10 year sector. Real money also sold in the very short end. The Treasury yield curve has flattened somewhat overnight with 5s 30s 1.4 basis points narrower at 251.2 basis points and 5s 10s 0.9 basis points narrower at 141.4. The 5s 10s 30s butterfly in unchanged at 31.4. The 5 year/30 year spread peaked yesterday at close to 256 basis points and the combination of Treasury supply (2s 5s 7s next week) and the weak Philly Fed provided the motivation for some to wade into the long end. I like 5s 30s earlier in the week around the 253 level and counseled owning a starter kit size position in that flattener. I continue to believe that the shortened weak and auction dynamics in that shortened week will work to the detriment of the belly. In addition, the power steepening of the curve will have tactical players unwinding profitable steepening trades. Longer term the signal is that the yield curve is in a sharp steepening move. I am not a technician nor do I pretend to be but the 235/240 level on 5s 30s was significant resistance and the fact that we have traded significantly through that level and sustained trading there indicates to me that there has been a fundamental shift in opinion on the shape of the curve. So if I am correct and there is additional flattening into the underwriting process I would look to reload the yield curve steepening trade when the process is completed.
Germany released its IFO Business Climate Index overnight and it printed at an 18 month high. The index came in at 109.3 versus 107.4 in the previous period. Ten year rates in Germany are 2 basis points higher on that news and one correspondent noted that the IFO strength might temper somewhat the wisdom that the ECB is heading immediately to negative rates.
The economic calendar in the US is light today with only the Job Opening and Labor Turnover Survey (JOLTS ) and the Kansas City Fed Report on Manufacturing.