G10 Rates Trading Update - 09/12/2012

Highlights

• Another quiet session ahead of the big events of the week.  Yields go out 0-2bp higher across the curve, with 10y sector underperforming
• Libor dropped over 0.5bp today, prompting further rallying in whites (but not a lot), as well as slightly tighter front end basis and tighter front end spreads
• Corporate issuance continues at a brisk pace.  Not much was swappable, but there was evidence of ratelock unwinds again. 
• The 3y auction was reasonably strong.  The bid/cover was much higher than normal, as were the indirect and direct bids.  However, the result was not too far from market coming about 0.25bp through. 
• Data was quiet.  Small business optimism and job optimism seem to be on the rise.

Comment

It was a rather quiet day, with light volumes ahead of FOMC and the German ESM ruling.  Yields go out little changed, but continuing their slow drift higher.  10y goes out right at 1.70, 1.5bp higher on the day, while swap rates were all within 0.5bp of unchanged.  Yields started the day about 5bp lower, following the late afternoon rally yesterday, but from London open onwards just kept drifting higher.  Data was light, but surveys of small businesses suggest a small increase in optimism.  Corporate issuance also continued on its steady clip.  While little of today’s issuance seemed to be of the swapped variety, some ratelock unwinds helped yields drift lower ahead of the auction.  The 3y auction cleared at yield slightly below market expectations, but the underlying guts reveal a pretty strong auction.  Bid to cover was 3.94, versus an average of 3.55 over the last 5, and both indirect and direct bidder participation was quite a bit higher than normal.  The strength from this result was brief, though, and yields soon crept back to their highs of the day.  The drop in Libor has begun to take on a brisker pace than what we’d become accustomed too.  After dropping 0.35bp yesterday, 3m Libor dropped another 0.55bp today.  2y and 5y spreads were slightly tighter, but further out spreads narrowed more as there was reported real money receiving and steepener unwind flows going through in the long end. 

We continue to favor wider spreads, and keep a generally neutral duration stance, with a bias to higher yields.  The sideways move over the past few days suggests the bond and equity markets have essentially priced in QE, but the more interesting move the last couple of days has been in the dollar index, which continues to get hit.