Bond Expert: Friday Wrap

Prices of Treasury coupon securities surged today as that which was tainted yesterday held great allure today. Yesterday the Treasury sold $10 billion long bonds and it created a market ruckus. Today investors flocked to the Long end and reversed much of the carnage that developed yesterday.

Pension funds and insurance companies were substantial buyers across a wide swath of investment grade fixed income product. The yield on the 2 year note slipped 3 basis points to 1.20 percent. The yield on the 3 year note collapsed 9 basis points to 1.53 percent. (The 2 year/3 year spread during the WI period traded as wide as 55 basis points and it is finishing today at 33 basis points.) The yield on the 5 year note declined 12 basis points to 2.31 percent. The yield on the 10 year note dropped 13 basis points to 3.72 percent and the yield on the Long Bond fell 13 basis points to 4.22 percent.

The 2 year/10 year yield spread narrowed 10 basis points to 252 basis points.

The 2 year/5 year/30 year butterfly has exploded in favor of the 5 year note and trades at 80 basis points. Today the 2 year/5 year curve flattened 9 basis points while the 5 year/30 year spread only narrowed one basis point.

Mortgage spreads are 6 ticks wider to swaps. Two year swap spreads are 4 ¼ basis points wider at 115. Five year swap spreads are 2 ¾ basis points wider at 108 basis points. Ten year swap spreads are 3 basis points wider at 33 ¾ basis points. Thirty year spreads richened two basis points to NEGATIVE 15 ¼.

Corporate bonds

Corporate bond spreads as measured by the IG 11 are under a bit of pressure. That index had traded in a range between 180 and 200 but has broken down and of late and a recent quote made it 205/207.Salespersons report a quiet market today. The featured deal yesterday was the Time Warner (TWX) offering of 5 year and 10 year bonds. The 10 year priced at T+525 and recently someone quoted the issue 510/490.

That two tranche offering yesterday pricedwith an inverted credit curve. As I mentioned the 10 year was T+525 but the 5 year issue required a wider spread to Treasury paper and that paper priced at T+590. This phenomenon is not confined to Time Warner but manifests itself in quite a few other names.

Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later and require a wider spread to protect portfolios from that risk.

Conversations with market participants, though, lead to a different conclusion. The credit spread inversion is a function of demand for duration. There is much more demand for 10 year assets from insurance companies and pension funds and that demand is evident in the number of credits which experience the inversion.

Agency close

Agency spreads got clocked again today. Spreads are wider by 10 basis points on the 2 year sector, 6 basis points in the 5 year sector and 10 basis points in the 10 year sector. Spreads began to crater earlier in the week when Mr Paulson changed his mind about buying troubled assets. One trader reckons that 2 year spreads are 25 basis points wider since that announcement. Five year spreads are about 20 basis points wider and 10 year spreads are about 30 basis points wider.

Treasury apparatchik Neel Kashkari (with the Orwellian title Treasury Interim Assistant Secretary for Financial Stability, which reminds me of the title of the flip side of the rock classic Satisfaction by the Rolling Stones, which was Under assistant West Coast Promotion Man ) did not do agency spreads any favors today when he averred that agencies have something slightly less than the full faith and credit of the US. His boss engaged in similar rhetoric earlier in the week.

Additionally, I spoke with a research analyst whose domain is the GSEs and he noted that the GNMA 10 Q released with their earnings this week was rather harsh and conservative. The forward-looking section, in listing the bad things which could happen, suggested that losses might be so large that $100 billion from Uncle Sam might not be quite a tidy enough sum to cover their problems.

They also suggested that it was within the realm of possibility that conservatorship might at some point morph into receivership.

So, not a happy week for the agonies.

Comments

[whidbey:]

If the GNMA is now issuing "warnings" things are turning a deeper shade of black, if possible.

The government's credibility, along with its underwriting on treasuries as Full Faith and Credit Instruments, (albeit they are honored with a lesser currency), will now be questioned anew by citizens and foreign creditors alike. Is this a set up? Clearly, this the beginning of the end of an orderly monetary/debt system. My clients in China are saying that they see a diversification away from anything issued by the US government or its business sector.

2008 Nov 15 11:12 AM

[dr.doolittle:]

interest rates are soaring in the corporate bond arena, but is issuance? Obviously cable companies have a voracious need for debt because the competition is so ferocious and the need to expand simply a matter of survival. How about telecom bonds, though? Are those getting clobbered, too? I see their stocks have risen smartly since the collapse in October.

2008 Nov 15 11:48 AM