Prices of Treasury coupon securities are exhibiting mixed changes in overnight trading with most benchmark issues registering very modest losses.
The yield on the 2 year note increased a solitary basis point to 0.98 percent. The yield on the 3 year note is dramatically unchanged at 1.53 percent. The yield on the 5 year note edged higher by a basis point to 2.46 percent. The yield on the 10 year note and the yield on the Long Bond increased in each instance by a basis point to 3.62 percent and 4.52 percent,respectively.
The yield curve has steepened a tad since I wrote my late in the day summary yesterday. The 2year/10 is year spread is 264 basis points and was 262 basis points when I wrote previously.
The 10year/30 year spread is 90 basis points and was 88 basis points late yesterday.
The 2year/5year/30 year spread has richened 2 basis points to 58 basis points this morning.
There was very little noteworthy economic news overnight. Consumer prices in Hong Kong declined 0.9 percent YOY which was the first time they have registered a decline since 2005.
There are no high profile economic releases today but trading in all markets will wait with bated breath for the testimony of Chairman Bernanke this morning.
He wrote an Op-Ed piece for the WSJ regarding exit strategies and I posted that earlier. It is interesting in that he emphasized manipulation of the liability side of the Fed’s balance sheet and deemphasized direct sales of assets.
He noted that the Fed could sell assets or in the case of mortgages experience prepayments which would also reduce assets.
However he principally focused on the liability side of the equation and noted that the new tool which allows the Federal Reserve to pay interest on reserve balances can be a very effective monetary policy instrument.
He also noted that the Fed could go the traditional route and use old fashioned matched sales to jack up the funds rate.
I would also be remiss if I did not reiterate a point I made in my original posting on this topic. The Chairman noted that he did not expect to use any of these tools soon as he expects that the funds rate will remain low for an extended period of time and that the exit strategy colloquy is a bit pedantic and unnecessary at the current time.
It is such because I believe Mr Bernanke will also strive to emphasize that the economy is still sliding, albeit at a reduced rate. I think he will note that the Committee expects the unemployment rate to stay at troublesome levels well into 2011 and that this will be another “jobless recovery”.
The Federal Reserve also has a keen interest in capacity utilization and I am sure he will note the slack in the economy generated by historically low levels of capacity utilization.