Bond Expert: Treasury Update

The Treasury will investigate large positions in an old 2 year note and an old 5 year note. The issues trade at zero in repo and have been failing heavily. Anyone with a position of greater than $2 billion will be required to report those positions to the Federal Reserve.

I wonder if this is the beginning of an attemp to clean up the fails in the Treasury market. I do not have a solution but do suggest caution, as a solution might have as an unintended consequence a reduction of liquidity in an increasingly illiquid Treasury market.

Several market participants with whom I speak suggest that the problem resides with several large central banks and who have chosen not to lend securities in the repo market. If those entities could be cajoled into lending again it would take quite a bit of pressure off the market.

The Treasury announced their intention to probe these two particular positions but that data is not expected to be reported until next Friday. I think that  will engender some covering in the suspect issues in the interim.

Treasury bond yields are rising in spite of the bond friendly labor data  released this morning. Participants report selling by dealers and customers as the community prepares to price and bid the refunding issues next week. One salesmen said that it was a case in which the market would be subject to selling pressure following the labor report no matter what the details of that report showed.

The roll on the WI 10 year is quite wide at about 10 basis points. So the issue which will auction next week is trading in the mid 3.80s.  As the issue waltzes its way into the 3.90s I think that substantial buying will emerge.

The WI 3 year note which had started its life trading in the mid 30s versus the  2year note is now about 53 basis points cheap to the 2 year. At that spread it is 45 percent of the 2 year/5 year spread. I think that as it approaches 50 percent of the spread buyers will emerge for the issue for this is a region which several traders have told me that they think is fair compensation for the inordinate supply which Treasury will regurgitate onto this part of the curve.

Swap spreads are marginally wider this morning on some hot money paying.

Two year spreads are 1/2 basis point wider at 106 1/2. Five year spreads are 1/4 basis point wider at 103. Ten year spreads are unchanged at 42 1/4 basis points. Thirty year spreads are1/2 basis point tighter at Negative 1 1/2 basis points.

Comments

[Mark Anthony:]

I mentioned this naked shorting of up to $2.29 TRILLION of US T-Bonds a week ago. Must read about this shocking story:
seekingalpha.com/artic...

Obviously it's so disturbing that the Treasury will have to investigate what's going on in the market. Read also Jim Sinclair's comments.

2008 Nov 08 12:36 PM