Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities have posted another day of gains with the strongest advance in the belly of the yield curve. The 5 year note, the 10 year note and the Long Bond are all back within in a whisker of the lowest yields of the “modern” era.As I recounted in my opening most benchmarks opened better than late closing levels. The Bond was the lone exception as it suffered as it was a hedging vehicle for a 40 year gilt auction in the UK. That auction weighed on both the 30 year and the 10 year.

I have also picked up reports of some customer selling of Bonds and off the run bonds. Some of the sellers are motivated by the absolute level of yields while others wonder why Bernanke and his acolytes would stoke a Treasury bubble with purchases of historically rich paper. This crew thinks that the Federal Reserve should buy pass- throughs to drive mortgage yields lower.

The market worked through the congestion engendered by the gilt auction and subsequently recovered. Several factors contributed to the market’s resurgence.

Stocks recovered from the severe sell off of yesterday but the recovery was tepid and one might conclude that the higher prices were eliciting selling. So the feeble nature of the stock bounce drove some to the risk free sector.

Oil slid most of the day and gave some the courage to buy as it fostered hopes of a salutary inflation outlook in the near term.

Finally, auto sales are tracking well below last month’s anemic levels.

The yield on the 2 year note is unchanged at 0.90 percent. The yield on the 3 year note is lower by 2 basis points at 1.11 percent. The yield on the 5 year note fell 5 basis points to 1.66 percent. The yield on the 10 year fell 5 basis points to 2.68 percent and the yield on the Long Bond fell 2 basis points to 3.19 percent.

The 2year/10 year spread narrowed 4 basis points to 178 basis points.

The 2year/5 year/30 year spread is 77 basis points. Observe that the 2 year/5 year spread narrowed 5 basis points while the 5 year/30 year spread steepened 3 basis points. Ergo, the 5 year note is a superstar.

Two year swap spreads are virtually unchanged at 105 ¾. The (illiquid I am told) three year swap spreads are 1 ½ basis points wider at 103 ½ basis points .Five year spreads are wider by 1 ½ basis points at 87 ½ basis points. Ten year swap spreads are wider by ½ basis point at 21 ¾ basis points. Thirty year spreads inverted ¾ basis points more to NEGATIVE 39 basis points.

Mortgages underperformed swaps by 14 ticks. Participants report some professional profit taking and an overabundance of apathy.

Comments

[jepittman:]

It appears to me that the treasury market is in a blowoff phase or equities are extremely overvalued. Care to take a stab at which situation it is?

2008 Dec 02 08:49 PM