April 24, 2014

Morning Comment

The bond market is in a grind mode this week. We rally a bit, and then give it back. Yesterday saw prices up; this morning sees them back down again.

The 2-year is 0.45%, the 5-year is 1.76%, and the 10-year is 2.71%.

Yesterday’s 5-year auction produced mixed returns. The awarded yield was 1.732% (below the early talk, but above where things were trading at auction time), the bid/cover ratio was 2.79 times (a bit below the exuberance of the last two 5-year sales), and the street take was 36.5% (below the average of the last 6 months but also higher than the aggressive bid last month). The 1.732% is the highest 5-year yield award in three years. As noted above, this bond is now a tad underwater from its auction result.

The 5-year has borne the brunt of what bearish activity there is out there and yesterday’s auction displayed this. The highest yield on the 5-year for 2014 has been 1.80%, posted just before the non-farm payroll report earlier this month. We are closing in on that level today. The highest yield on the 5-year in 2013 was 1.86% posted on September 3, just before that month’s non-farm payroll report. The 5-year yield leapt from 0.68% on May 2, 2013 (just before May’s non-farm payroll report, see a pattern here?) to 1.62% during the taper tantrum, finally peaking in early September as noted. So the takeaway is that QE tapering is not good for 5-year notes. We had the yield adjustment last year on the talk of tapering and we have another yield adjustment this year as tapering is actually underway.

By contrast, the 30-year bond is sitting at 3.50%, well below its 2014 high of 4.00% as well as the 2013 high of 3.90%. QE tapering has not taken a bite out of the long end yet.

Today brings the 7-year auction. Current guesses have the awarded yield coming in at 2.32%. Bloomberg is running a story that shows the yield spread between the 7-year note and the 30-year bond at the lowest pickup since 2009. The idea here is that future fed funds increases will hurt the front end of the curve while a low inflation rate will benefit longer-term debt. Last month saw the yield award at 2.258%. If today’s award comes in at expected levels this will be the highest 7-year yield in 3 years. There was a very strong bid from direct and indirect bidders last month, leaving the dealers with just 26% of the sale. This week’s 2 and 5-year note sales have not seen the same enthusiasm away from the dealers so the bidding will probably be cautious even at these better yields.

Durable goods orders for March rose by a larger-than-expected +2.6% and the core numbers were better as well. This is a pretty volatile series so the market is not overly nervous about it. Initial jobless claims popped to 329k, well above the more sanguine numbers in early April, but the data was probably affected by the Easter holiday period. Continuing claims, on the other hand, declined again to the lowest reading since the Great Recession took a bite out of jobs.

Jeff Smith
Director of Investment Sales

Jeff's comments and insights, based on his professional expertise and the knowledge he has acquired observing the U.S. economy and global markets, are offered as his own personal observations and opinions, and not necessarily reflective of those held by SunCorp, our board or member credit unions. Please do not respond to this message as this e-mail address is un-monitored.


April 2014

Nearly five years after the U.S. economy bottomed out and began its slow recovery, the employment market reached a significant milestone in March: payrolls, excluding government agencies, exceeded their pre-recession peak......Read More

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