Prices of Treasury coupon securities registered modest declines today as the Larry Kudlow fantasy came to fruition with a strengthening dollar pushing the price of oil through key resistance levels and propelling stocks to sharp gains. The fear, which persisted yesterday and which many (myself) believed would be magnified by the stern financial medicine at Merrill Lynch (MER), faded quickly today as oil prices tumbled. Inexplicably to me, financial shares rallied and Treasury prices dropped.The yield on the benchmark 2 year note jumped 8 basis points to 2.65 percent. The yield on the benchmark 5 year note climbed 7 basis points to 3.38 percent. The yield on the Long Bond gained 6 basis points to 4.06 percent and the yield on the Long Bond posted a 4 basis point gain to 4.64 percent.

The 2year /10 year spread narrowed 2 basis points to close at 142 basis points.

The 2year/5year/30 year butterfly finished the day with little change at 53 basis points.

Tomorrow the Treasury will announce the details of the quarterly refunding package tomorrow. The conventional wisdom anticipates about $15 billion 10 year notes and about $10 billion Long Bond.

The Government faces a huge money gap and Treasury will also announce what measures they will take to cover that gap. Many proposals and ideas have been put forth. The cleanest measure, in my opinion is an increase in 10 year issuance. Most other proposals face some obstacle or obstruction.

Economic data released today was perceived as economy-friendly. In an earlier posting I presented an alternative view on Case Shiller. In a similar way the slight increase in confidence is not cause for celebration. It remains at 16 year lows and the jobs portion of the survey is troubling and increases the odds of a particularly weak number Friday.

Treasury traders reported light activity ahead of the refunding announcement but one Long Bond trader noted better buying in his sector by an eclectic group of end users.

With oil crumbling and the dollar strengthening, TIP bond spreads are making new lows. The 10 year spread which I follow assiduously is 231 basis points. I do not have the capacity to print a history but it has been quite some time since the spread has been that narrow. In one of the recent periods of issuance the supply concession brought it to 234 basis points; the the move inside of that level is a significant technical milestone.

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John Jansen

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