There is not alot trading so I am going to dispense with my normal close.
The yield on the 2 year not is unchanged at 0.98 percent. The yield on the 3 year note has increased a basis points to 1.47 percent. The yield on the 5 year note has declined a basis point to 2.36 percent. Likewise, the yield on the 7 year note dropped a basis point to 2.97 percent. The yield on the 10 year note has edged lower by 2 basis points to 3.30 percent. The Long Bond is once again the star performer as its yield has dipped 4 basis points and rests at 4.05 percent.
The 2year/10 year spread is 232 basis points.
The 10 year/30 year spread narrowed 2 basis points to 75 basis points.
The belly of the curve is suffering the slings and arrows of most outrageous fortune as the 2year/5 year/30 year spread is now 31 basis points. The spread opened trading today at 34 points.
Why do we see such significant out performance by the Long Bond?
I think there are several reasons. For starters, the hedging of exotic structures which I wrote about continues. And the yen has chosen to remain below the 90 level and will probably do so through quarter end.
With quarter end repatriation flows completed we will obtain a much better read on sentiment when the calendar flips to October.
The other reason for strength in the Long Bond is that some traders have taken to heart FDR’s nostrum that the only thing we have to fear is fear itself. The Open Market Desk has encouraged a worry free environment with its constant repetition of the mantra that the funds rate will remain low for an extended period of time.
That mantra has motivated a return to risk taking. As I have noted here each days volatility is gliding lower. Corporate bond spreads have collapsed dramatically. Stocks are partying as if it was 1999.
I believe that some portfolio managers have gotten caught up in the Federal Reserve rhetoric and have taken it to heart. They are now happy to head out the yield curve and are willing to get yield by buying duration. As one friend of the blog noted in a conversation today , they are treating the 30 year bond as if it is a cash equivalent.
That is a fine strategy as long as the Federal Reserve is firmly on hold and (more important) as long as there is a greater fool out there. At the first inkling that the Federal Reserve is changing course it will be a very ugly exit and bond holders reverse course.
This seems to me to be the sort of risk taking environment which promoted the bubble which caused the recent financial calamity. I wonder if level headed folks at the FOMC might develop a little angst of their own and wonder about the results of their policy.
Maybe the Warsh article was a shot across the risk taking bow. We shall see.