April 17 2014 Opening

April 17th, 2014 6:28 am | by John Jansen |

Prices of benchmark Treasury securities in the belly of the curve and the Long Bond have posted very small mixed changes when measured against levels which prevailed at 800PM last evening in New York. The yield on the 5 year note has declined a basis point to 1.64 percent. The yield on the 7 year note slipped to 2.20 from 2.206. The 10 year note barely budged as its yield inched higher to 2.636 from 2.635. The yield on the Long Bond moved up to 3.452 from 3.449. That makes the curve a bit steeper and reverses some of the power flattening of yesterday. The 5s 10s spread is now 99.6 after trading at 98.5 late yesterday. The 5s 30s spread is 181.2 following its breach of 180 yesterday. The 10s 30s spread is 81.6 after trading at 81.4 late yesterday. When I composed this electronic missive twenty four hours ago the 5s 30s spread was 185.4 so there was 5.5 basis points of flattening. Similarly, the 2s 5s 10s spread which closed on Tuesday around 23 basis points and traded last night at 29 is now around 27.5 with the overnight resuscitation of the 5 year note. I am not sure how to explain the significant underperformance of the belly yesterday. Ms Yellen did not change the rules much in my estimation but most analysis that I have read have stressed the dovish nuances of her speech and the probability that following the completion of the tapering an actual increase in the cost of funding is just a distant dream. That leads me to believe that the move in the market is active traders owning bad positions exiting those trades. So the flattening which began gently yesterday induced some bad positions to cover and then the even worse levels induced more players to rip up poorly established positions. I draw this conclusion because I did not hear of active trading by end user clients. Most traders described client activity as modest so my guess is that the street was jumping ship before today’s shortened session and subsequent long holiday weekend.

Separately, if one concludes that Ms Yellen is a fan of extremely easy money and (a big if here) and if one believes that inflation will lie dormant and quiescent for the rest of John Jansen’s natural and supernatural life then one might reach the conclusion that rate hikes when they come will be slower and that the terminal funds rates will not be 4 percent but something closer to 2 to 2.5 percent. I have some end users and one very seasoned prop trader with whom I converse who do hold that view and they firmly believe that on that basis the curve is way too steep and will continue to flatten over time as their view gains adherents.

What do we have in the way of overnight news? Google and IBM both missed earnings estimates and equity futures are off modestly this morning. In Japan the huge government pension fund (GPIF) heard an advisor to the fund on restructuring suggest that its should reduce its holdings of local bonds to 35 percent from 55 percent which is about $245 billion bonds. Consumer confidence in Japan dropped to its lowest level since August 2011 in response to the hike in the sales tax. Property prices in China fell 5.6 percent YOY and unsold completed property jumped (an ominous) 23 percent YOY. The government in a small stimulus measure reduced reserve requirements for rural banks.

In terms of cleint flows central banks bought 5s and real money Japan bought off the run 7s and 10s.

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