Across the Curve

Bond Market Close August 06 2009

Prices of treasury coupon securities are finishing, on balance, with small gains as the market erases some of the losses and some of the curve steepening experience of yesterday.

The market opened with a firm tone but quickly faded as real money mortgage sellers emerged and with that some paying in the belly of the swap curve. The stronger than expected claims number added to the gloomy mood.

The market reversed as the Open Market Desk bought back bonds in the belly as well as MBS.

I would also suggest that day traders got caught,too. The 10 year note had a cup of coffee at the 3.80level and I suspect as it traded to 3.77 and 3.76 day traders would have taken a shot from the short side.

In a game of musical confirms those traders would have been quick to cover and that activity would have pushed the market through the 3.75 percent level.

Tomorrow we confront the monthly labor report. The consensus number is -325K. If there is a whisper number it is for an even better for the economy number. UBS has been forecasting a 250K print for awhile and one source reported that Deutsche Bank revised its estimate to 150K today.

I think that it will be quite interesting to see the price action tomorrow. A good for the economy number could   initiate a real debacle. In June when the number printed better than expected the curve flattened dramatically in front of these auctions and the street never had an opportunity to properly shoot the taxpayers in the big toe via the yield curve trade.

The yield on the 2 year note declined a basis point to 1.20 percent. The yield on the 3 year note slipped 2 basis points lower to 1.74 percent. The yield on the 5 year note fell 2 basis points to 2.71 percent. The yield on the 7 year note declined a basis point to 3.37 percent. The yield on the 10 year note is unchanged at 3.74 percent. And the yield on the Long Bond is 3 basis points lower at 4.52 percent.

The 2year/ 10 year spread is a basis point narrower at 254 basis points.

The 10 year /30 year spread is 3 basis points flatter at 78 basis points.

The 2year/5year/30 year spread is unchanged at 30 basis points.

Breakeven inflation spreads narrowed with the 10 year narrowing to 192 from 195 and the 30 year tightening to 222 from 228.