Across the Curve

Some Opening Comments June 6 2008

Prices of Treasury coupon securities posted disparate results in overseas trading as the repercussions of the statement yesterday by ECB grand poohbah and President, Jean Claude Trichet , resonated with investors around the globe. The ECB head had noted yesterday that the ECB might raise rates at its July meeting. The yield on the benchmark 2 year note has climbed by 5 basis points to 2.54 percent. The yield on the 5 year note is higher by 1 basis point at 3.33 percent. The yield on the 10 year note has actually dropped by 2 basis points and sits at 4.02 percent. The yield on the Long Bond has also dropped, by 3 basis points, and is 4.71 percent.The 2 year /10 year spread has flattened by 7 basis points to 148 basis points.

The same flattening of the yield curve occurred with a vengeance in some of the overseas markets.(Let me note that I do not have a Bloomberg terminal and I have cobbled this together from the Bloomberg internet site as well as from a Reuters article. To the best of my knowledge it is accurate but I do feel as though I have one arm tied behind my back.) IN Germany the yield on the 2 year note has climbed by 2 basis points to 4.65 percent and the yield on the 5 year note has climbed by a basis point to 4.44 percent. The yield on the 10 year note DROPPED 4 basis points to 4.42 percent and the yield on the 30 year dropped a stunning 11 basis points to 4.72 percent. There is a Reuters story which I will attempt to link to which notes that the 2year/10 year inversion in the Euro zone is at its most inverted level since the introduction of the Euro (which I believe was 1998).

I wont recite each of the details but the yield on the 2 year note climbed by 10 basis points while the yield on the 10 year note dipped by 2 basis points.

So Mr Trichet initiated an avalanche with his statement about the near term course of monetary policy.

Stocks surged in Asia but are posting mixed results in Europe. Futures trading indicates that US equities will open modestly lower following the sharp rally yesterday.

The main focus of traders today is the monthly labor data which will be released in its customary fashion at 830AM New York time. The consensus anticipates that employers shed 60K workers in May.

The market approaches the data with the 5 year note at the approximate midpoint of its recent trading range (3.52 percent to 3.14 percent). With all the noise from central bankers this is a tough one to trade. I think that the risks to the market are symmetrical on the extreme outcomes. So if payrolls increased by 10K (rather than the anticipated decline) I suspect that the market would hold the back end of the recent yield on high on 5 years at 3.52 percent. Similiarly, if there was a -130K print I do not thing that the market would breach the recent low yield at 3.14 percent.