Across the Curve

Seven Year Itch

The Treasury will auction the largest batch of seven year notes  in the modern era ($ 29 billion) in about an hour. There is a very funny Woody Allen piece from the 1970s entitled My Speech to the Graduates in which he defines the modern era ending with the recording of I Want To Hold Your Hand by a group from Liverpool. He had the era opening with something authored by George Bernard Shaw. I digress.

The seven year note looks  rich on the curve. The butterfly 5/7/10 was recently trading around 25 basis points which is the rich side of the recent 25/31 range.

I think the the issue is rich  for a reason: solid demand. The belly usually leads the market and it is doing so in this instance. The 2 year/5 year spread which I chronicle ad nauseam is trading around 37 basis points, indicating demand for the belly relative to the wings.

This is also an issue which does not have natural end user sponsorship. And with the Open market Desk about to withdraw its support it will be even more of an orphan issue than before.

HOWEVER, the stock market has rolled over and trades rather poorly. That price action will drive buyers as hope springs eternal that equity markets will suffer the yearly October swoon.

Risk aversion is also apparent in the US dollar which has posted sharp gains today.

The bottom line is that I do expect a small tail on this one but it appears that the 10 year note will make another run at the 3.25 level.