Treasury Update
May 27th, 2008 9:08 am | by John Jansen |The Treasury market is taking quite a drubbing this morning. The Long Bond is down about a point (and mixing metaphors) the yield on the 10 year note has climbed back above the 3.90 percent level.Several stories have been making the rounds to explain the large movement lowers in price. One story attributes the move to a soon to be announced corporate deal and anticipation of that deal sparked rate lock selling.
Another story attributes the poor market tone to a report by an analyst at Barclays who believes that the yield on the 10 year note will be 5.00 percent by August. He apparently believes that the current rate of inflation is inconsistent with a sub 4 percent yield on 10 year notes.
Each of those explanations pales when I set it against a simpler view from a seasoned bond trader. He answers the question regarding today’s market with a question of his own. Why did the market trade higher in price on Friday? Yes, the equity market was diving but he notes that volume was extremely light and driven by short covering.
In his opinion the salient point is record supply from the Treasury. As I mentioned in a prior posting the Treasury will regurgitate $49 billion of securities this week and another chunk with a new year bill next week.
That supply confronts a shrunken dealer community with less appetite for risk. Customer interest in risk averse assets has faded as the panic bid which prevailed pre Bear Stearns has taken a vacation. There are fewer players and the Treasury is flooding the market with new securities.
That is a tough environment and is one in which the dealers will look to exact a pound of flesh from the taxpayers. Ergo, higher rates.
