Supply inspired steepening
Nov 6, 2019
–Bear steepener Tuesday with 2’s up 4.3 bps to 1.633% and 10s up 8.1 bps to 1.865%. While 2/5 treasury spread made a new high yesterday (chart) at 3.6 bps, 2/10 and 5/30 remain below previous highs. 2/10 closed at 23.2 vs a high of 28.2 in mid-Sept and 5/30 at 67.6 vs a high of 79.6 in July. It makes sense for the belly of the curve to exhibit weakness as the market prices out the idea of further easing. The near FF curve is becoming quite flat with FFX9/FFF0 at just -3.25 having been at -20 a month ago. FFX9 to FFJ0, a period which covers three FOMC meetings, settled -11.25. On the euro$ curve, EDH0/EDH1 settled -16, a new recent high, though below the interday high of -14.5 set on Oct 30. While the treasury curve is perking up, reds/golds in euro$’s are lagging, closing 17, up 2.875 bps. Late July red/gold had gotten as high as 34.5.
–The takeaway is that treasuries are starting to trade a bit like a bear market, though unconfirmed as yet by volume and increases in implied vol. However, nominal midcurve straddle levels in greens and blues have flipped and are now slightly greater than reds. Like a mullet haircut…business in the front, party in the back.
–Today brings the ten year auction. Productivity and Unit Labor Costs expected 2.3 and 2.6. NY Fed’s Williams gives opening remarks at 9:50 to a Global Risk Forum.
