Treasury Market Update

July 31st, 2014 9:06 am | by John Jansen |

The Employment Cost Index posted its largest increase since the fateful year 2008 and that has heightened apprehension that the FOMC will remove the spiked punch bowl sooner than previously believed. That fear has prompted another sell off in the market and a pronounced curve steepening. The 5s 10s spread has widened to 80.1 from 78.8 at 600AM today and from 74.3 3xactly 24 hours ago. The 5s 30s spread has moved to 156.1 from 153.8 early this morning and from 149.6 24 hours ago. The 10s 30 spread is now 80.1 following a 78.8 print early this morning and a 74.3 print 24 hours ago. If you wanted volatility you have it now.

Dealers report that clients (both real and end users) are unwinding flattening positions. Some of those unwinds represent winners coming off and some melancholy losers established at less than optimal entry points. One trader noted that the FOMC was less than sanguine regarding inflation and if one puts credence in the musings of that august body then a 2.55 10 year and a 3.3 Long Bond are not attractive.

I think there is another factor at work here,too, and that is the calendar. August is a huge vacation month and liquidity evaporates. Investors with large positions which they are considering moving will not want to be trapped by wide bid offer spreads as we roll through the dog days of summer. The Treasury will sell 3s 10s and 30s in mid August and Germany and the UK and France will also issue paper. With the perception developing that the FOMC will be moving sooner rather than later the issuers of sovereign debt will discover what it is like to sell that debt into a bear market with dealers allocating less balance sheet to that debt. It could get very ugly.

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