The Treasury 5-30 yield spread is as wide as it has been in a month at 184 basis points. It has become rather accepted wisdom that you might get away with selling just about anything as long as it is not bonds.

 

Increasingly, it is considered taboo to look for the long end to react negatively to stronger growth or inflation. There was new news on neither inflation nor growth today so the weaker price action out the curve does not dispel that notion. What then, if anything, is behind the weakness today in the long end?

 

Having for a time considered that the short positioning in Eurodollar futures (and options), again at new record levels, had been to some extent offset by longs in the long end of the U.S. curve and additionally longs in Europe (rate space), we look today at the possibility that there is some unwind of this positioning.

 

The long end is being sold and the front end is holding up well enough. The Euribor strip is lower (before the exchange host went down). These developments might point to some removal of curve flattening positioning and ‘the other leg’ to the record short in Eurodollars.

 

In the absence of strong buying in the front end of the curve, we might wonder if some hedge fund accounts are showing a willingness to shift their position to a more bearish tone. It is a data quiet week with a bit of chatter coming from the Fed and a look to the Fed minutes on Wednesday. If substantial position adjustment is to be made, it is best done this week into strength. Therefore, it makes a bit of sense that we see selling in the long end into earlier strength today. We shall find out over the coming days if this has preceded some buying up the curve into, yet to materalize short-end weakness.

 

As to the 5-30 yield curve, we should expect substantial resistance toward 190 basis points and continued move toward 120 bps.