Across the Curve

Bond Market Close July 1 2010

Prices of treasury coupon securities registered bifurcated results today with price gains in the front end and little change or outright losses elsewhere on the curve. The curve steepening which resulted stems from the supply and duration which shall strike the market next week. Supply trumps all other factors and traders are now busy anticipating that fiscal onslaught.( Larry Kudlow who I generally dislike and who was a shill for Bush Administration does have a great description when he refers to the profligacy of the current Administration as “fiscal nymphomania”.)

Some weakness in the entrails of the ISM report as well as the Yellen statement provided a fundamental backdrop for the trade.

I think there are two other stories which have influenced trading today.I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import. I believe that there is some buying of the front end to hedge uncertainty associated with that sad circumstance.

Separately, there was a story this morning about the IMF issuing bonds. That would be a negative for US bonds as issuance from that quarter would draw reserves from the US bond market at a time when they are sorely needed.

The yield on the 2 year note declined 7 basis points to 1.04 percent.The yield on the three year note tumbled 8 basis points to 1.54 percent. The yield on the 5 year note slipped 4 basis points to 2.51 percent. The yield on the seven year note is unchanged at 3.20 percent. The yield on the 10 year note edged higher by a basis point to 3.54 percent and the yield on the Long Bond increased by the same amount to 4.34 percent.

The 2year/10 year spread widened 8 basis points to 250 basis points.

The 2year/5year/30 year spread is at recent wides at 36 basis points.

The market awaits the labor report tomorrow. The consensus sees a decline in employment of 365K and a rise in the unemployment rate to 9.6 percent (from 9.4 percent currently).