Bond Expert: Thursday Wrap

Prices of Treasury coupon securities surged today as the explosive rally continued in advance of the Labor report tomorrow morning. The yield on the 2 year note dropped 6 basis points to 0.83 percent. The yield on the 3 year note dropped 7 basis point to an amazing 1.00 percent. The yield on the 5 year note declined 9 basis points to 1.51 percent. The yield on the 10 year note dropped 10 basis points to 2.55 percent and the yield on the Long Bond slid 8 basis points to 3.08 percent.The 2year/10 year spread narrowed 4 basis points to 172 basis points.

The 2year/5year/30 year spread is 89 basis points. Once again the 5 year note is a superstar as it narrowed three basis points versus the 2 year note and steepened a basis point versus the bond.

Often times the Thursday before an Employment Friday is a day for position squaring and lazy trading. The opposite happened today as dealers report significant customer activity.

The Federal Reserve announced the agency issues that it would buy tomorrow and to the surprise of the assembled throng they are buying 0 to 2 year paper rather than the 5year through 10 year paper which the conventional wisdom had latched onto as the sector the Fed would buy. That had dealers and customers scurrying to cover shorts in the front end.

Japanese clients were sellers of 10 year paper as they took profits on well established positions. Real retail sold 10 year treasuries to buy very cheap TIPS bonds. And another trader reported some selling of off the run bonds by pension funds as they rang the register on gains.

Anomalies abound in the Treasury market. That which is cheap remains cheap or gets cheaper and that which is rich remains rich or gets richer. One frustrated trader cited several examples in the long end. A glaring example is the relationship between the August 2023 bond and the November 2024 bond. They are 15 months apart on a positively sloped yield curve. Yet one can sell the Nov 2024 paper and hike back to Aug 2023 and pick up 32 basis points. That makes no sense under any circumstance and my source suggests that those relationships will not repair until the calendar reads 2009.

Swap spreads widened 9 ½ basis points in the 2 year sector and 6 ¾ basis points in the 5 year sector. Ten year spreads widened 4 ½ basis points and 30 year spread widened (less negative) by 2 basis points.

The Federal Reserve announcement that it would buy short agencies weighed on swaps as some bought agencies and paid swaps against those purchases expecting that this going away buyer would benefit the agencies relative to swaps.

There were some crazy movements in the European market for swaps. The 30 year swap rate traded between 2.50 percent and 3.25 percent. The 50 year swap rate traded between 2.00 percent and 2.95 percent. The guy who received at 2.00 percent should submit to a urine test.

Agency spreads are tighter by 3 basis points in the 2 year sector. With the Fed announcement that 2 year sector outperformed swaps by 12 basis points. In the 5 year sector spreads widened by 6 basis points and outperformed swaps by one basis point. And 10 year spreads widened by 7 basis points and lagged swaps by 2 ½ basis points.

Once again the big news in this sector was that the Fed was buying short paper rather than long paper and that forced some realignment.

Mortgages outperformed swaps by about 1/4 point today and even higher coupons participated in the festivities.

Comments

[whidbey:]

madness and fear over the employment report? Yes, and there is more to come. Actually anything will do. The Bet is that GM and F both take gas sometime in the next six months. This is the picture turmoil and I suspect it get worse into the end of the year. Then comes the new regime with its growing stimulus, reportedly a trillion is being considered.

Bond yields will fall for a while yet then tip up for a wild ride toward new highs. That happens when it is realized the bond holders may not paid. Personally I am be attracted by PM - no return but maybe safer.

2008 Dec 04 05:37 PM