Prices of Treasury coupon securities posted truly bifurcated results today as the yield curve steepened dramatically. The yield on the 2 year note slid 6 basis points to 1.03 percent. The yield on the 3 year note dropped 7 basis points to 1.42 percent. The yield on the 5 year note fell 5 basis points to 2.02 percent. The yield on the 7 year note fell 4 basis points to 2.70 percent.
In the long end of the market it is a decidedly less friendly picture. The yield on the 10 year note increased by 4 basis points to 3.03 percent. The yield on the 30 yield bond increased 3 basis points to 3.70 percent.
Against that background and some simple arithmetic juggling, one can observe that the 2 year /10 year spread is wider by 10 basis points at 200 basis points. One seasoned veteran with whom I converse believes that the unending flow of long end paper will send the 2year/10year spread to 250 basis points on the next 90 days.
The 2year/5year/30 year butterfly which it is my custom to follow here has richened by 8 basis points to 69 basis points from 61 basis points yesterday.
The 5year/7year/10year butterfly has moved to 35 basis points from 38 basis points at the close yesterday. Most of that is the steepening of 7year/10 year which has moved from 27 basis points to 33 basis points.
In an earlier post I cited some reasons for the steepening. I think that there is one point worth repeating and there is one point to add. Much of the price action represent street longs after two weeks of heavy supply. An ancillary cause is a month end trade which never materialized. The longs needed to hedge positions and decided to sell 10s and 30s against their positions.
Over the course of the afternoon I did locate some traders who had observed real end user selling from investors who were casting their financial vote on the Obama budget.Those sellers looked at the budget and apropos Roberto Duran fighting Sugar Ray Leonard they cried, “no mas.”
Ergo, we end up with a much steeper yield curve.
Regarding that supply one economist with whom I speak believes that at some point this year the Treasury will sell Long Bonds on a monthly basis (currently eight times per year) and in a back to the future moment will seriously weigh reintroducing 4 year notes and 20 year bonds on a quarterly cycle.
If that came to pass that would take me full circle as that would constitute the financing cycle when I began working for a primary dealer (Chase Manhattan Bank) in May 1981.
Separately, the announcement next week of 3s, 10s and 30s should bring $32 billion, $16billion and $12 billion, respectively.
There were several pieces of economic data available today. Economists at HSBC that the employment piece of the Chicago Purchasing Managers survey was the second lowest reading in the history of that report.
JPMorgan economists reported that the steep downward revision in Q4 GDP resulted from adjustments to trade, inventory and consumption. The adjustment to inventory should aid and abet any nascent recovery in the second half of this year.