Bond Expert: Wednesday Wrap

Nov.19.08 | About: iShares TIPS (TIP)

Prices of Treasury coupon securities posted gains today but the extent of the gains depended on the point on the yield curve at which the security resided. The yield on the 2 year note slipped 6 basis points to close at 1.07 percent. The yield on the 3 year note dropped 9 basis points to 1.34 percent. And then the bigger gains begin. The yield on the 5 year note tumbled 15 basis points to 2.05 percent. The yield on the 10 year notes dropped 17 basis points to 3.36 percent. The yield on the 30 year bond crashed 17 basis points to close at an incredible 3.95 percent. The 2 year/10 year spread flattened 11 basis points to 229 basis points.

The 2 year/5 year/30 year butterfly is 92 basis points. The 5 year note flattened 11 basis points versus the 2 year note and only underperformed the bond by 2 basis points.

TIPS breakevens got crushed today as the headline CPI dropped a full percentage point. The 10 year TIPS declined 2/32 today while the nominal bond rallied 1 ¼ points. The breakeven in 10 years is just 46 basis points.

Tomorrow the Treasury will announce a new round of supply. Prognosticators expect $35 billion 2 year notes and $25 billion 5 year notes.

Swap spreads are 6 ½ basis points tighter in the 2 year sector which leaves them at 103. Five year spreads are 8 tighter and are closing the day at 96 basis points. Ten year spreads are 5 tighter at 25 basis points.Thirty year swap spreads inverted by 5 more basis points and are now NEGATIVE 33.

Mortgages lagged swaps by nearly a full point.

Agency market

I had not watched the agency market today but it is undergoing an historic meltdown of its own. (I should sponsor a contest in which the winner supplies me with a synonym for meltdown, which I am overusing. First prize is a free subscription to The 2 year benchmark widened 22 basis points today to finish at 180. Less than two weeks ago on November 7 it closed at 113. The five year benchmark sector widened 11 basis points today to finish at 155 basis points. The five year benchmark was 109 on November 7th. Ten year benchmarks are 9 basis points wider at 162 basis points. They closed at 115 on November 7,

I use the November 7th date as that was about the low point following an episode of spread tightening following the previous widening. That date is also just prior to the announcement by Secretary Paulson that he was not unrolling the TARP and chose to spend his money by purchasing bank equities rather than illiquid and damaged assets.

It was also just prior to the time in which the Secretary and several of his acolytes engaged in linguistic acrobatics in which they would not ever say that agencies are full faith and credit instruments. Lack of that explicit guarantee has led some large buyers to shun the sector.