Bond Market Close Aug 31 2009

August 31st, 2009 11:41 pm | by John Jansen |

Prices of Treasury coupon securities have traded with volatility within a narrow range today and are closing near the best levels of the day.

As I reported in an earlier missive, rate lock selling caused a mini panic in the long end of the market and at one point the 30 year bond was 3/4 point lower.

That selling proves to be of the one off variety and without follow through selling the month end index extension trade dominated flows and pushed prices higher (and since the inverse relationship between yield and price remains intact, yields moved lower!!).

The yield on the 2 year note slipped  4 basis points to 0.98 percent. The yield on the 3 year note declined 5 basis points to 1.48 percent. The yield on the 5 year note fell by 5 basis points to 2.40 percent. The yield on the 7 year note slipped 5 basis points to 3.04 percent. Likewise the yield on the 10 year note slipped 5 basis points to 3.40 percent. The Long Bond languished relative to its yield curve brethren as its yield dropped just 2 basis points to 4.18 percent.

The 2year/10 year spread is a basis point flatter at 240 basis points.

The 10 year also outperformed the 30 year bond as the 10year/30 year spread widened 3 basis points to 78 basis points.

The 2year/5year/30 year spread is little changed at 36 basis points.

I have not recorded TIPS spreads here in several days. Those spreads have narrowed quite a bit since I last wrote of them. Ten year spreads are 165 basis points today. Most of last week they were in the mid 170s.

Thirty year spreads are 204 basis points today. Most of last week they were in the zone around 215 basis points.

The narrowing of those spreads is an indication that investors are expecting reduced levels of inflation in the fuure.

The market cannot seem to break out of its range. We sit at the expensive end of the 3.50 to 3.40 percent range which has prevailed recently. The market is expecting stronger data over the course of the week and is here anyway.

We get a chance to view the national ISM tomorrow and that should show strength. Car sales should be propped up be the cash for clunkers dough from Uncle Sam. And most are counting on another decline in the nuber of jobs being shed by businesses. We expect that yet the market is here.

I think it will take a combination of successiveley weaker than expected numbers to spark a run to lower yields.

Vacation time predominates and in that environment the second stringers will be slow to act.

Supply is never far from view. On Thursday the Treasury will announce a new 3 year note and a reopening of the 10 year and Long Bond. The total package should be a shade less than $ 75 billion.

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