Curvology

October 30th, 2014 11:44 am | by John Jansen |

The ferocious flattening has subsided and the curve has re steepened and the 5 year note has undergone some yield curve rehab. I had marked 5s 10s as narrow as 70.4 at one point this AM. That spread is now 72. The 5s 30s spread was as narrow as 143 but has widened out to 144.7. The 2s 5s 10s spread was as cheap as 40.6 and it currently trades at 39.

Why the re steepening. One trader noted that the GDP details were not as strong as the headline and augur for a weaker Q4. Government spending (he said) contributed 0.8 to Q3 growth and that is unlikely to be repeated. In addition exports contributed 1.3 percent to Q3 growth and with the strength of the dollar that boost to growth will fade away in Q4.

In addition, risk assets are not collapsing today. The Dow is up triple digits and the S and P is up modestly. If you expect the 30 year bond to trade in the vapors below 3 percent you need to offer the buyer some rationale for buying and a rallying equity market does not give that buyer cover for purchasing 30 year duration at levels close to the lowest recorded since humans learned to walk erect. I would also be remiss if I did not point out that the rout in EM currencies extant early this morning has faded and those currencies are recouping losses

Finally, the 5 year battering went too far too fast and was oversold on a short term basis.

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