Keep watching this spread

The Treasury yield curve steepened yesterday between 5 year notes and 30 year bonds. The spread reached below 179 basis points ‘tight’ before rebounding to close toward 184 bps. The spread is ‘wider’ again this morning by a basis point or so.
 
Since mid-November then described ‘blow-off top’ above 250 bps wide, the yield spread has narrowed toward its 6 month low in front of the March 18-19 FOMC meeting. After the statement release from that meeting indicating a greater appreciation for economic growth prospects and where the ‘Summary of Economic Projections’ indicated higher than expected forward rates, this yield spread narrowed nearly 30 additional bps to yesterday’s low.
 
There was trade yesterday that appeared to be removal of flattening positions in that part of the curve and again overnight there was some additional trade that was either a take profit or an initiation of a steepening position. In either case, the flattening has temporarily ceased.
A bullish candlestick pattern over the prior two sessions called a ‘bullish engulfing’ would be confirmed with a strong (wider) close today. Personally, I would not expect too much from this development, but would respect the implications if confirmed, looking possibly for a retest of support toward 190-195 and possibly, but not expected, to 203-205.
 
About the Author

Martin McGuire, managing director at TJM Institutional Services

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