Tuesday, April 7, 2009

Are Long Bonds About to Break Through or Bounce Back?

The WSJ reports:

A fresh batch of Treasurys up for sale this week sent prices on long-end Treasury futures lower Monday, sending anticipated yields higher even as investors sought safety from falling stocks.

Futures contracts on 30- and 10-year Treasurys declined as the U.S. government announced that it will sell $59 billion in 10-year notes, 10-year Tips and three-year notes in coming days, the latest debt issuance as the government seeks to fund a bevy of financial rescue efforts.

"This is the Treasurys looking at the supply we have coming in this week," Lesh said. "If we didn't have equities down the way they are, I'd imagine the 10-years would be worse."

The impending glut of new Treasurys canceled out investors' renewed trepidation around the prospects of big banks and general wariness around first-quarter earnings reports, which begin this week.

Source: Yahoo


  1. Jake, can you explain how issuance in the 10 yr and 3 yr affects the Long Bond?

  2. there are a lot of ways to view this. here are a few quick thoughts:

    1) there are natural buyers of treasuries in general (one can think of this as total aggregate demand for treasuries of all maturies). as the supply is increased, regardless of where on the curve, prices decline (thus yields rise)
    2) if the 3 and 10 year treasury yields rise, then the 30 year yield should rise based on the incremental risk associated with a longer maturity bond (i.e. why in general the yield curve is steep).
    3) new issuance and quantitative easing increases the likelihood of inflation in the futures, thus the 30 year nominal yield must rise to have an equivalent real yield (all else equal).

    make sense?

  3. Very clear, thank you