Too much Treasury supply to bear?

September 9, 2009

Treasury’s auction of $20 billion of 10-year notes – the second in a three-part $70 billion fund raising effort this week – drew in some aggressive bidding, but the broader market is having problems finding its footing in the aftermath.

The long bond had piled on more than 6BPs in the immediate aftermath of the sale Tuesday, though it’s pulled back some in the interium, making for an attractively steep yield curve for those funding their longer term purchases at short term rates. The spread between 3-month Libor and the long bond now stands around 407 basis points.

This brings up another point. Yesterday, the blog zerohedge posted a piece from its guest blogger, Yves Lamoureux of Blackmont Capital, who noted some unusual behavior in the bond market- namely that dealers are holding onto their long positions in 30-year Treasurys. You can see the full post here.

But given the steepness of the yield curve, I wonder why they would significantly want to pare them down. It’s one of the easiest ways to generate gains and with the Federal Reserve not even hinting at a rate hike, it’s a trade they’re likely to keep on for some time.

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Interesting. Are term structures upward- or downward-sloping in the US at present ? Also, is it an inverted yield curve ?

Posted by Casper | Report as abusive