Bond Expert: Monday Wrap

Prices of Treasury coupon securities registered mixed changes today in a lackluster session dominated by an air of waiting and anticipation. Participants await the outcome of the election tomorrow and the refunding announcement on Wednesday. Later in the week, participants will focus on the labor data. Market News International reports that the consensus expects a decline in non farm payrolls of about 200K. The yield on the benchmark 2 year note slipped 14 basis points to 1.43 percent. The yield on the 5 year note tumbled 13 basis points to 2.70 percent. The yield on the 10 year note declined 5 basis points to 3.91 percent and the yield on the Long Bond edged higher by one basis point to 3.34 percent.

The 2 year/10 year spread widened 9 basis points to 248 basis points.

The 2 year/5 year/30 year butterfly richened 4 basis points to 37 basis points.

On Wednesday when the Treasury announces the refunding package, participants expect $25 billion 3 year notes, $20billion 10 year notes, and $10billion reopened Long Bonds.

The roll on the Long Bond will be an easy to compute 1½ basis points as it is a reopening and the only component is the carry.

The 10 year note roll should begin trading at around 5 basis points.

Pricing of the new 3 year note will be a more onerous project. There is no roll as there is no outstanding issue. The sector is particularly expensive. A proprietary trader and friend of the blog reports that the 2year/3year/5year butterfly has richened 40 basis points in the last 2 months.

So the dealers will have some work to do if they are to make a prospective $25 billion issue palatable.

Swap spreads are 3 basis points wider in the 2year sector and 6 wider in the 5 year sector. Ten year spreads are 3 basis points wider as are 30 year spreads.

Mortgages are virtually unchanged versus Treasuries and flows were very light.
Economic data released today painted a gloomy and dismal picture. Car sales were running at about an 11 million units annualized pace. One year ago that number was in the vicinity of 16 million units.

And the ISM report illustrated an economy falling out of bed as the various component pieces of that index deteriorated.

Agency close:

Agency spreads are unchanged in the 2 year sector and wider by 3 basis points in the 5 year sector and wider by 5 basis points in the 10 year sector. The level of customer activity was very light. One trader said that the prospect of a Freddie Mac (FRE) benchmark announcement weighed on sentiment and left spreads under pressure. The trader thought that prudence would lead them to do a 3 year as they have not brought benchmark paper in that bucket since June.

The trader noted that a large component of any offering would entail the street buying existing agency paper from investors and selling the new bond to end users. He cited two problems with that process. The street has little balance sheet for the off the run agency paper and the stuff is so cheap ( in some cases 20 to 25 cheap to benchmark paper that it would be a tough sale) that it would be risky to offer bonds in the 5 year and 10 year sectors for fear of a sloppy result.

This particular trader believes that it would be fruitful for Freddie to arb their own issues by buying cheap off the runs and issuing benchmark paper.

Discount notes performed admirably today. Freddie sold 3 month paper today at 1.60 which was 10 basis points through where the issue was trading pre auction. The issue was 1.35 bid at about 230PM.

The same issue auctioned last week at 2.45. The Federal Reserve lowered rates by 50 basis points but there is significant improvement even when one accounts for that action.

Comments

[dr.doolittle:]

so tax cuts will be permanent because democrats are all about love and not about governence. the "McCain collapse" has ended and now this economy will explode with growth. When will the Fed start raising interest rates?

2008 Nov 04 10:24 AM