Distended Belly

April 20th, 2014 10:02 pm | by John Jansen |

The market sold off rather dramatically on Thursday and the 10 year note traded back to about 2.73.  I had opened the issue at about 2.64 in the early morning on Thursday. In that sell off traders clubbed the 5 year note as if it was a baby seal. The 2s 5s 10s spread opened Thursday morning at 27.3 and finished the day at 34.2. That exceeds the previous cycle cheap of 33.8 on march 19 just prior to the fateful FOMC statement  and Yellen’s rookie error press conference. The spread subsequently recovered and as recently as April 14 traded at 16. There are auctions in the belly this week with 2s 5s and 7s on the docket. Some of the cheapening is certainly in response to the auctions and some of it is in response to ongoing sales of intermediates against the back end which I discussed here.

I think the extent of that back up in the belly is overdone and at some point this week during the supply the sector will be a buy.

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