Prices of Treasury coupon securities are registering modest gains today. Once again the curve is flattening as the market improves with the larger gains achieved in the longer maturities.
It has been particularly difficult to mine reasons for the price gains today and what I offer is a synthesis of about half a dozen conversations with traders and salespersons.
I continue to hear the mantra that the market is thin and illiquid and that it does not take many bonds to move the market with so many players on holiday. I guess my problem is that the Treasury sold $ 27 billion year bills today as well as the $42 billion 2 year notes. Each of those auctions came with minor concessions and the rest of the market was nonplussed by that supply or (more significantly) by the impending supply. If it was so thin and so illiquid, then things should have been sloppy and stayed sloppy.
There are many shorts in the market and those shorts lack staying power. As the market fails to gratify the shorts, the shorts cover. However it is a game of musical confirms as (hypothetically) Goldman (for the conspiracy junkies) is buying from JPMorgan. But JPM is creating a new short position and will soon find itself covering from HSBC (once again hypothetically). So some argue that professionals have passed the last two days trading confirms.
One portfolio manager cited the Bernanke appointment as a positive for bonds as it removed a veil of uncertainty from the marketplace. Some argue that Bernanke is a lackey of the White House, but imagine the uproar if Summers or a Yellen had been appointed to the post. Rahm Emanuel would have enrolled in Money and Banking 101 at University of Chicago very quickly. So the reappointment of Bernanke warms the hearts of some who believe that it will provide a modicum of independence and integrity and inflation fear at the central bank.
Commodity prices slumped today. Oil and copper slumped and I am told that the Baltic Dry index is or has rolled over. TIPS are echoing that price action as breakeven spreads are crumbling. The breakeven spread on the 10 year TIPS narrowed to 176 basis points from 184 basis points. The breakeven spread on the 30 year TIPS narrowed to 211 basis points from 216 basis points yesterday.
I almost neglected to mention the index extension at month end. That is not until Monday but many are talking about that and I suspect some are stockpiling securities in advance of that.
And finally the Open Market Desk will conduct a buyback tomorrow in the August 2026 through August 2039 region.
The yield on the outstanding 2 year note slipped a basis point to 1.01 percent. The yield on the 3 year note declined 2 basis points to 1.54 percent. The yield on the 5 year note dropped 3 basis points to 2.45 percent. The yield on the 7 year note fell 3 basis points to 3.09 percent. The yield on the 10 year note fell 3 basis points to 3.44 percent and the yield on the Long Bond declined 4 basis points to 4.24 percent.
The belly of the curve performed quite well in this rally. The 2year/10 year spread narrowed to 243 basis points. The 2year/5 year /30 year spread is 35 basis points. I believe that was 32 basis points this morning.