November 27 2013 Opening

November 27th, 2013 6:56 am | by John Jansen |

Prices of Treasury coupon securities have drifted lower in overnight trading. ( I thought there would be a dearth of material on the day before Thanksgiving but there is actually quite a bit of information to comment upon and dispense.) Dealers report Asian buyers in the off  the run 5 year sector and dip buyers in the Long Bond. Prop traders ,as is their wont, sold 10 year notes. The yield curve versus 5 year notes and adjusting for the roll into the WI registered mixed movements overnight. The 5 year/10 year spread at 137.2 is 2.8 basis points flatter but the aforementioned roll is about 3 basis points so the curve in actuality is a tad steeper. In contrast the 5s 30s spread at 345.8 is 3.7 basis points flatter and since the roll is 3 basis points that spread is then 0.7 basis points flatter. The 5 year 10 year 30 year fly I obsess about here is 1.9 flatter at 28.5 basis points. If we were to calculate using the old 5s the spread is nearer to 32 which makes it a tad cheaper.

Jack Lew and his acolytes and attendants at the US Treasury will complete this week’s coupon cornucopia with an auction of $29 billion 7 year notes. If we observe another butterfly, the 5s 7s 10s we will find that when using the WI 7 year that roll is at about +5. At the worst levels of the interest rate carnage in the summer that spread peaked at around 8 basis points. The 7 year note traded at its cheapest level at 2.46. So the 7 year rallies 40 something basis points and the spread only moved three basis points. I would assert that given rate levels the seven year note (and its 10 year cousin on the 5s 10s 30 butterfly ) is cheap. It is a pre holiday trading day and the auction is at 100PM so absent very weak economic data today I think that it will take some additional concession to make these bonds attractive because once dealers own these things they will be searching for the exits as they head to home and hearth.

Regarding economic data there is quite a bit and in the aggregate it could provide some clues about the state of the macro economy. There will be releases on Durable Goods Orders, Initial Jobless Claims, Michigan Confidence and Chicago PMI.

The mighty greenback is suffering the slings and arrows of outrageous fortune against some currencies. The Euro flirted with 1.36 on formation of a governing coalition in Germany as well as the strongest confidence number in Germany since the world began to unravel in August 2007. And the British pound traded as high as 1.6304 when stops forced professionals to cover.


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