Prices of Treasury coupon securities posted mixed results today in a lackluster pre holiday session. Economic data, the month end extension and a 5 year note auction punctuated the lack of activity.The GDP revision to 3.3 percent from 1.9 percent was significantly greater than expected and was shocking given the financial strains and turbulence of the last several months. At that level the economy is growing above trend. Most analysts attributed the strength to the inordinate contribution of the export sector which contributed 3.3 percent to GDP growth.
The bond bulls note that foreign economies have slowed and demand should slacken in the weeks ahead, In addition the dollar has rallied significantly and that will make US exports more costly for foreign buyers. Consequently, the gains of this quarter should be short lived.
The Treasury auctioned $22 billion of 5 year notes with a yield of 3.129 percent. That was about 1 ½ basis points cheaper than where they were trading in the street prior to the auction. The dealer community shot the taxpayers in the big toe on this one as the issue is currently trading at 3.08 percent. The forward roll is about 2 ¾ basis points.(The 2 year roll is trading at 4 ½ basis points.)
The curve has flattened today and the market has recovered since the auction results became available. I think that the flattening is a combination of dealers and clients executing month end extensions today rather than tomorrow when liquidity will be at a steep premium.
The month end extension reflects in the price action. In a dramatic twist I will give the benchmark yields in reverse order. The yield on the Long bond actually declined a basis point today to 4.37 percent. (That begs the entirely appropriate question of why anyone would want to own a 30 year bond at that level with CPI running above 5 percent.) The yield on the 10 year note has increased a basis point to 3.77 percent. The yield on the benchmark 5 year note has climbed 3 basis points to 3.04 percent. The yield on the benchmark 2 year note has climbed 4 basis points to 2.37 percent.
The 2year/10 year spread narrowed three basis points to 140 basis points.
The 2year/5 year/30 year spread (using the new 5year and the new 2year) is about 60 basis points.
Mortgages are 7 ticks tighter to swaps. I spoke to one senior salesman with a reasonably elite clientele and he noted that there is virtually nothing trading and if someone bought a billion current coupons it would move the basis 6ticks to 8 ticks. Mortgages also benefit from the continued decline in vol.
Swaps are 1 basis point to 2 basis points tighter between 2 years and 10 years.
Agency spreads were mixed with 2 year spreads 2 basis points tighter and 5 year spreads unchanged. Ten year spreads are unchanged to a tad wider.
Blogging output today was down as many of my sources are out and the ones who are here report very little business being transacted. The bond market closes early tomorrow. I will blog in the morning and then have an early close of my own.