Across the Curve

Bond Market Close October 20 2009

Prices of Treasury coupon securities are posting solid gains today.

In a game of chess there is rarely one move which is the game changer. Victory comes often times to the player who has made a series of strong moves and accumulates a winning advantage in that way.

In the bond market today it is that same theme of an accumulation of factors which pushed prices higher and ( with the inverse relationship between prices and yield ever intact) yields lower.

Foreign money continues to pour into the Treasury market. Several sources (three to be precise) noted buying in the 5 year through 10 year sector. One of the three also reported buying of bonds and off the run bonds by foreign official institutions.

Economic data this morning motivated some buying. PPI was weaker than expected and some took solace from that release. That seems to this observer a little specious as oil has surged and any diminution in inflationary pressure from that source is likely to be transitory.

Housing starts were also weaker than expected and a bullish tone from that is understandable.

Finally, JPMorgan was issuing $ 1billion of some funky hybrid structure in the 30 year sector and I suspect that trading strategies associated with the pricing of that deal would have had a beneficent effect on the long end of the US Treasury market.

The yield on the 2 year note has edged lower by 5 basis points to 0.91 percent. The yield on the 3 year note dropped 6 basis points to 1.43 percent. The yield on the 5 year note tumbled 7 basis points to 2.27 percent. The yield on the 7 year note declined 6 basis points to 2.92 percent. The yield on the 10 year note also fell 6 basis points and the yield on that instrument is 3.33 percent. The Long Bond lagged the field today as its yield fell just 4 basis points to 4.16 percent.

The 2 year/5 year/30 year spread is 53 basis points after beginning the day at 48 basis points.

The 2year/10 year spread flattened a basis point to 242 basis points.

The 10 year/30 year spread widened 2 basis points to 83 basis points.

TIPS bonds lagged nominal bonds today as the PPI result and upcoming supply weighed on sentiment. On Thursday the Treasury will announce a 5 year TIPS auction.