Bond Expert: Friday Wrap

Prices of Treasury coupon securities reversed course today and surrendered some of the outsized gains achieved yesterday. Some participants suggest that the frantic, frenzied flow observed at the end of the day yesterday was the crescendo or climax that is observable at the end of a process rather than a beginning. So some believe that, whatever type of position dynamics drove the trade, it is probably over now.

The yield on the 2 year note jumped 9 basis points to 1.07 percent. The yield on the three year note climbed 16 basis points to 1.33 percent. The yield on the 5 year note increased 10 basis points to 1.99 percent. The yield on the 10 year note moved 16 basis points higher to 3.17 percent and yesterday’s star had its glow dimmed as its yield soared 18 basis points to 3.66.

The 2 year/10 year spread widened 10 basis points to 210 basis points.

The 2 year/5 year/30 year butterfly closes the week at 75 basis points after trading into the 90s earlier in the week.

The equity market floundered for most of that day but has rallied robustly over the last hour. Participants cite the news stories that Federal Reserve Bank of New York President Geithner is allegedly President-elect Obama’s choice to head the Treasury as the reason for the rally.

Others took solace from news that the FDIC would ease rules for bank debt to qualify as full faith and credit under a previously announced program. That instilled some confidence in the market that banks would successfully rollover maturing debt.

Mortgages outpaced swaps today by 24/32.

Two year swap spreads are 5 ¾ basis points wider at 107 ½. Five year spreads are 6 ¼ basis points wider at 99 ¼. Ten year spreads are 7 ¼ basis points wider at 22 basis points. Thirty year spreads normalized by 17 basis points but still trade NEGATIVE 37.

One participant noted the volatility on the swap rate curve. In the wee hours of the morning the 5year/30 year spread along the swap curve was inverted by 5 basis points. As the weekends it is positive 31 basis points.

Comments

[ryoung8177:]

I wish that the so called experts would at least aread the paper before writing. Why does nobody mention the treasury crack down on failure to deliver borrowed treasury securities? And the same goes for the manipulation at the futures pits, where it has become common knowledge that there will now be enforcement for failure to deliver. There is a short squeeze on and the 30 swap is enforcing it. I am a cash owner of a substantial portfolio of treasury securites and benefit, but had know idea that I could borrow some, sell them and never have to deliver. This is the kind of crap that cost the Bush types the election.

2008 Nov 22 10:14 AM