Across the Curve

Bond Market : Opening Comments Feb 26 2008

Prices of Treasury coupon securities continued their steady descent in overnight trading. European equity markets are posting solid gains and futures markets point to a robust opening for equities in the US. Fears regarding the nationalization of the banking system have faded and the rebound from multi year lows in equities has stimulated the animal spirits in some investors who hold the view that song term structural shorts should be covered and that on a risk reward basis current levels are fair levels to establish long positions.

Overnight the UK government cajoled, coerced, and probably commanded Royal Bank Scotland to move the tidy sum of $425 billion in bad assets into a government fund. That action redounded to the benefit of bank stocks in particular and stocks generally.

All of these factors combined with the anticipation of the last leg of the Treasury’s issuance (new 7 year note today) to push bond prices lower.

The yield on the 2 year note climbed 2 basis points to 1.10 percent. The yield on the 3 year note increased 4 basis points to 1.49 percent. The yield on the new 5 year note edged higher by 4 basis points and stands at a lofty 2.07 percent. The yield on the 10 year note increased 4 basis points to 2.97 and the yield on the 30 year bond also rose 4 basis points and is at 3.62 percent.

The 2 year/10 year spread is wider by 2 basis points at 187 basis points.

The 2year/5year/30 years butterfly has narrowed to 58 basis points. That is because of the inclusion of the new 5 year in the calculation and the 4 basis point forward roll into that issue.

The 7 year note which the Treasury will sell later has improved versus the 10 year  note and now trades 25 rich to that issue. The 5year/7year/10 year butterfly is 42 basis points and roll adjusted is actually a basis point cheaper than where it was in late trading yesterday.