Bond Expert: Midday Update

Treasury bill auctions: I just spoke to a T bill trader and he expects that the yield on the 3 month bill will be zero. That is down from 0.005 percent last week.

He expects that the 6 month bill will yield 0.23 percent which is down from 0.30 basis points last week.

Each auction was $27 billion last week and remains at that level today.

The trader with whom I spoke holds the view that there will be a back up in bill rates when the calendar flips to 2009. However, any backup will be rather slight since with financing close to zero percent there is no room for significant yield increases.

He also noted that the yield cannot be negative as there is no facility on the bidding terminal for submitting negative yields.

However, one might win only a fraction of the amount for which he bid. Hypothetically, if there were $270 billion bids for 3 month bills at zero, there would be an allocation process. If you bid for $10 million you would receive just 10 percent, or a $1million award.

MBS: Mortgages are pretty much in line with swaps today and swaps are a couple of basis points weaker.

Mortgages have benefited from the decline in Libor levels as rolls have exploded and the carry consideration on MBS is now quite favorable to the financing holder. Financing should remain friendly and that should push more buyers into the sector.

Swap spreads: Swap spreads are marching wider. Two year spreads are 2 basis points wider at 107 3/4 . Five year spreads are 4 basis points wider at 89 1/2. Ten year spreads are 4 basis points wider at 23 1/2 basis points. Thirty year spreads are less inverted (perverted) than I have seen them recently as they have normalized 6 1/4 basis points to NEGATIVE 25 1/2 basis points.

Regarding the inversion in the 30 year spread, a new source suggests that there is a gaggle of clients who have virtually no balance sheet space and relative value can play no part in their decision making. They can not put Treasury paper on balance sheet so they are compelled to receive swaps notwithstanding the ludicrous levels.

There has been back end paying today.

Corporate bonds: Corporate bonds (secondary) have leaked wider today in trading described as very thin and very illiquid. The IG 11 is 264 after trading as wide as 268 basis points.

There were two significant new issues today for top shelf names:

• Procter and Gamble (PG) offered and priced $2 billion 5 year bonds at T+ 310. One market participant said that level represented a 50 point concession to outstanding paper.
• United Technology (UTX) is offering $1.25 billion 10 year notes. I do not believe it has priced as of this writing. The talk is T+ 360 which is also 60 basis point to 70 basis point concession.