Across the Curve

Bond Market Close March 06 2009

Prices of Treasury coupon securities sagged today in spite of a dismal, dire and dour labor market report. In the steel cage death match between the economic fundamentals and the supply and demand technicals, the overwhelming issuance of bonds by the US Treasury is swamping the weakness in the economy.

The yield on the 2 year note increased 3 basis points to 0.91 percent. The yield on the 3 year note climbed 5 basis points to 1.33 percent. The yield on the 5 year note climbed 4 basis points to 1.84 percent. The yield on the 10 year note edged 2 basis points higher to 2.83 percent. The yield on the Long Bond moved 2 basis points higher to 2.83 percent.

The 2year/10 year spread narrowed a basis point to 192 basis points.

The 2year/5year/30 year spread cheapened as it moved from 79 basis points to 74 basis points.

There were some interesting flows today. One dealer reported real money sellers of the 5 year and 10 year sectors.

Another dealer was a little les pedestrian as he told of heavy sellers of off the run 5 year paper and, to a lesser extent, sellers of off the run 10 year paper. The sellers were overseas based and were booking profits into year end. Other sellers sold as they need the dollars to support their home currency.

As the paper comes into the street, shackled traders do not have sufficient balance sheet to hold a position and any bonds which a dealer bought are quickly liquidated. It will be interesting to see if balance sheet constraints are a major factor as quarter end approaches.

There were also sellers of 10 year TIPS.

The economic calendar is light next week. I think the dealer community will bide its time shooting the taxpayer in the big toe in advance of the issuance.