Treasury Market Update

April 21st, 2014 10:48 am | by John Jansen |

The Treasury market is particularly comatose and moribund this morning. Volumes are extremely thin and the folks who are kind enough to share information with me regarding client flows aver that unless I wanted them to fabricate something there are no meaningful client transactions this morning.

That did not preclude us from engaging in intelligent discourse on the shape of the curve. The 5s 30s spread about 30 minutes ago was 177.5 basis points. Jack Lew and his attendant lords will auction a new batch of 5 year notes on Wednesday. The roll into the WI is 3 basis points and that would make 5s 30s 174 1/2 basis points. One bond market historian with whom I conversed notes that in 2003 before the FOMC began to tighten in 2004 the 5s 30s spread double bottomed at 173 in September and December 2003. The spread then traded between 173 and 195  until the FOMC began to tighten in June 2005. That precipitated a flattening and the spread eventually bottomed around 140.

Similarly, if you look at 2s 5s 10s with the WI rolls factored in that spread looks very cheap. The question is whether or not it will richen. Some with whom I speak think that improvement in the belly can only be episodic in nature. They think that some very large end users with gargantuan positions are veritable super tankers making very large looping turns in the ocean. They are and have been long the belly and in anticipation of eventual FOMC rate hikes  and they are neutering trades held for several years. There is also buying of the bank end by LDI types. In addition speculation is that the largest Japanese pension fund will start selling domestic bonds and buy duration in the states. The Japanese government is actively engaged in the process of debauching and debasing its own currency and that process can only make the bonds of a the US Treasury in a land in which the Federal Reserve is reducing accommodation even more attractive vis a vis JGBs.

So at least his morning the people with whom I speak think that powerful forces are at work which will keep the belly cheap and any reversal is likely to be just a mild episodic correction of that process.


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