Friday 6 August 2010

Two Year Treasury Yields Drop Below .5% First Time Ever; 30Yr/10Yr Spread Widens Again

In the wake of yet another anemic jobs report, Two-Year Treasury Notes Drop to Record Low Yield.
Treasuries rallied, pushing two-year note yields below 0.50 percent for the first time, after the government�s payrolls report showed the economy lost more jobs in July than economists forecast.

�Everything you look at is much weaker and keeps the same pro-Treasury sentiment,� said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. �There will be much more discussion about another round of quantitative easing.�

The 2-year note yield slid two basis points to 0.51 percent, extending its weekly drop to four basis points, after falling to the all-time low of 0.4977 percent. The 10-year note yield touched 2.8130 percent, the lowest since April 2009. The 5-year note yield dropped seven basis points to 1.50 percent after reaching 1.4851 percent, the lowest since January 2009.

�When you get down to 50 basis points on two-years, that�s giving you a signal that there�s not much left on the table,� Gross, founder and co-chief investment officer at Newport Beach, California-based Pimco, said in a radio interview on �Bloomberg Surveillance� with Tom Keene. �So the extension out on the yield curve is what we�ve been attempting over the past several weeks and the past several months.�

�We now have a combination of a weaker economy, no job growth, no inflation and possibly deflation, and it�s not getting better,� said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management Corp. in Jersey City, New Jersey. �The market can try to continue to try to find reason why we are not Japan, but if it looks like a duck and quacks like a duck, why isn�t it a duck? Investors should stay long on Treasuries as rates can go even lower on the front and back end of the curve.�
Yield Curve as of 2010-08-06

Curve Watchers Anonymous is once again watching the yield curve. Here are a couple of charts.



The above chart shows today's reaction to the monthly jobs report: Jobs Decrease by 131,000, Rise by 12,000 Excluding Census; Unemployment Steady at 9.5%; June Revised from -125,000 to -221,000

The following chart shows the yield curve over time.



click on chart for sharper image

The chart depicts weekly closes. 10-year yields did slightly exceed 4% in April but those highs do not show in the above chart. Thus, the decrease in yields is even more dramatic than shown.

Note the huge rally on 5 and 10 year treasuries as compared to the 30-year long bond. It appears as if someone is putting on a long-10 short-30 spread.

If the economic data continues to be poor (and I believe it will be), the low in 10-year yields may not even be in even if the low in the 30-year long bond is in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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