The Bond Column

Week in Review/ Week Ahead
Updated: 2010-03-22, 08:55:26 ET
Analyst: Beth Malloy

Week in Review

Treasuries were focused on flattening the curve for most of the week, taking the 2-10-year yield spread back off to the narrowest levels since the start of the year. The shorter end took most of the heat as the trade looks out to supply on tap for the next week. The 2-year was swung lower to take the yield to the highest levels since January 8, while the longer maturities, held up better in the low inflation and inflation expectations environment.

The shorter maturities should continue to be jumpy, while the long end outperforms, continuing the flattening, which will likely continue through the 2-and-5-year auctions are taken down. While growing global supply has crowded the market, the week's auctions are expected to be absorbed fairly easily. But it most be noted that last month's 5-year offering was a bit bumpy, with a higher rate demanded. The at-record sized, $42 billion, 5-yrs has been consistent since November and this offering may make a better showing.

Talk of higher rates, specifically the discount rate, with the funds rate on hold through to at least the second half of the year, with a number of dealers looking out to the first quarter of 2011. The surprise rate hike out of India, with more seen in the next month, added to the currency of such talk as has talk of further tightening out of China. According to one well placed dealer, while the regional banks can request a discount rate hike at any time, they will likely hold off until month end, if at all, as low inflation and a still negative jobs picture makes any further moves unnecessary "until, at least a couple months out," and he is an optimist.

The move on the discount rate back in February saw the Federal Reserve go to great lengths to indicate it was not, not, an indication of a change in policy, and intended to drain liquidity, and move the spread between the discount and funds rate back toward the more normal 1.00% seen in recent years, when the rate was generally moved in concert with the funds rate. Back in 2001 it the spread was generally 0.50% back before the "discount rate" designation was changed to the "primary credit rate" in early 2003.

The Week Ahead

Next week will be all about size, offering the latest, at-record sized, auctions, with the market set to take down $44 billion 2-years Tuesday, $42 billion 5-years Wednesday, and $32 billion 7-years Thursday. Monday brings $28 billion 3-month and $29 billion 6-month bills.

The economic calendar is fairly light, with existing home sales hitting Tuesday and new homes Wednesday while GDP and University of Michigan March final hit Friday.

The Federal Reserve talking calendar is packed. Chairman Bernanke will speak Saturday to a bankers group. Atlanta's Lockhart speaks two times Monday, Philadelphia's Plosser and San Francisco's Yellen, Kansas City's Hoenig and vice chairman Kohn Wednesday.  Cleveland's Pianalto and Bernanke's rescheduled exit strategy testimony will be seen Thursday. Governor's Warsh and Turullo as well as St Louis' Bullard take their turns Friday. The market will be listening for further hints and highly suspicious of any mention of the "discount rate." Treasury's Geithner will also speak Monday.

Beth Malloy