Lunch With Dave & A Look @ 5s and 10s

Lunch with dave is worth a look this afternoon IF/when you have a moment. We like that he responded TO Bill Gross call the other day and would be happy to discuss what it is we think we KNOW Bill was doing just yesterday (the day AFTER uber-bear call). We ALSO like that Rosy talked about AAII poll as you know, we too were looking at that yesterday. Finally and possibly most interestingly today, were Rosy’s comments on GDP. Specifically, we find it interesting that State and Local Government spending was down again. We caught that but honestly didn’t know what, if anything, to make of it. Rosy mentioned it in context of being TWICE what Biz CapEx is, yet it is something we hear very little of. Huh. Imagine that. Have a look:

Lunch With Dave

Now in as far as bond market goes – we’re NOT gonna be much help. What looked to be NOT WEAKER data (GDP, Chicago and UoMich Final) is currently producing a firm bond market. Well maybe not. What WE think IS contributing to stronger prices at moment is NO SUPPLY, UPS plane (bomb) scare currently going on, some (profitable) short covering going on, PIIGS now re-widening (our proprietary 10yr PIIGS vs Bunds spread back OUT 12bps on day) and finally, index extension. THAT all is a mouthful BUT WAIT. We’ve got MORE.

We’d add to all of the above, some color from ‘the street’ we found interesting:

1) There was a well advertised seller of Ultra Long Contracts to Buy 5yrs this morning … that trade sat down the long-end buyers off of the GS report this morning…

2) Just heard this second hand…so I don’t have the details…but supposedly  there was a 11am option expiration that took a large block (3 to 4 billion) 5yr out of the market…you can see the up surge in 5yr futures starting right at 10:55am, so this info appears to be correct..

Now we have a big dislocation in the curve … 5yrs way out performing everything else…with 10yrs staying below there single print zone of 126-08/09+, it seems to me that the 5yrs, now that the these 2 big trades are done, will settle down and trade lower as the day goes on…obviously anything can happen, but if we start to break down below 100-07 area in cash 5yrs … do not buy the dip …

With THAT in mind, we’ll offer a couple of visuals – 10yrs YIELD, 60mins over last several sessions where we identify the current ‘knife fight’:

Sorry to switch up gears on you from the above – PRICE – to the below look at 5yr YIELDS:

Battle lines drawn. These are nowhere NEAR the quality and depth of the CitiFX ‘spooky charts’ or a GS note suggesting 10s/30s will reflatten. We’re just throwing these up on the table and saying that 10s vs 100-8 is important and 5s vs 1.17 is ALSO important. End of week and month today just add to the Monday-morning quarterbacking we’ll ALL be doing in as far as the interpretation of what happens NEXT. Happy Halloween.

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