Prices of Treasury coupon securities surged today with the largest gains in the longer maturity issues.
The yield on the 2 year note declined 3 basis points to 1.10. The yield on the 3 year note declined 2 basis points to 1.72 percent. The yield on the 5 year note edged 3 basis points lower to 2.67 percent. The yield on the 7 year note fell 4 basis points to 3.30 percent. The yield on the 10 year note fell 5 basis points to 3.63 percent and the yield on the Long Bond dropped 8 basis points to 4.36 percent.
The yield on the Long Bond had touched 4.82 percent earlier in the month and has now rallied 46 basis points from that level. The curve has flattened by 9 basis points as in that same time frame the yield on the 10 year note has declined 37 basis points to 3.63 percent from 4 percent at its high.
The 2year/10 year spread is 253 basis points.
The 2year/5year/30 year spread is now 12 basis points. That is as cheap as it has been in the year I have followed it here.
One friend of the blog points out an interesting way to evaluate the cheapness at the current time of the 5 year note. He takes the yields on the 2 year note and the 10 year note and averages them(currently around 2.37). He then places that against the yield on the 5 year note and finds that the yield on the 5 year is 1.13 times the average of the 2s and 10s.
Using monthly closes back to 1980 the ratio has never been that high.In 2003 the ratio reached 1.08 and in late December 1992 it touched 1.07 percent.
So on a relative basis there is record yield in the 5 year sector.
The Treasury sold $ 40 billion 5 year notes today and the bidding interest from central banks was frantic. The indirect category of bidding ( which the street holds is a proxy for central bank interest) took 68 percent of the total. That leaves about $ 13 billion for the rest of us.
That auction result assisted in maintaining a firm market tone.
The long end benefited from traders buying the back end against the supply tomorrow and Thursday in 5s and 7s.
I also think there is a perception shift at work here,too.
The World Bank began the shift yesterday with its forecast of a steeper contraction in the global economy this year. I also saw a report that the OECD issued a report which posited that the number of unemployed individuals would reach 57 million and 10 percent in the developed world in 2010.
And I think that some are now thinking that while we have averted a cataclysm (barely) that is not recovery and that the sprouting shoots do not ccontain the germ of a strong recovery.
So take a seat and wait for the ex cathedra pronouncement of the FOMC tomorrow.