Aug 12. The risk for bond prices is to upside, what if the Fed DOESN’T taper?
–Treasuries continue to grind to lower yields with the new ten year down 1 bp to 2.578. Volume was quite light, and open interest declined across the treasury curve, suggesting short covering. (2’s -4900. 5’s -15k, tens -3700, bonds -5600. But euro$’s added 43k positions). Tapering is still a hot topic as we get get closer to the Sept FOMC. But as far as the bond market is concerned, I believe it’s fully priced in. Consider the budget deficit as % of GDP: in 2009 it was over 10%. It has fallen even since to 7% in 2012 and is expected to be just 4% in 2013 (CBO). In a $16 trillion economy 1% is $160 bln, so a change from 7 to 4% is $480 billion or $40 billion per month. It’s not as though the treasury has decided to issue $40 bln less per month, but the loss of $10 to $20 billion in Fed purchases should have no appreciable effect, especially given the rise in rates at the longer end that has already occurred. Now, what happens if the Fed DOESN’T taper. Tens could easily drop right back to 2.30, which would be over 2 points in futures.
–This afternoon the gov’t budget number for July is released, expected -$96 billion. Retail Sales on Tuesday.
Here is a link from Calculated Risk on the budget deficit:
http://www.calculatedriskblog.com/2013/02/cbo-deficit-to-decline-to-24-of-gdp-in.html
