Bond Expert: Monday Wrap

Prices of Treasury coupon securities surged today as international geopolitical factors combined with market technicals to steepen the Treasury yield curve.The front end of the Treasury market received a boost from money seeking to hide from the ongoing problems in the Mideast. So the latest sad imbroglio there fostered a mini flight to quality.

The curve has flattened significantly the last six weeks and there is some unwinding of profitable positions by professionals into year end. Additionally, there are participants who made money being short last week’s supply and those happy traders are unwinding those positions.

Flows are very light and one Treasury trader noted that many of the largest investors had ceased taking big positions about a month ago.

The yield on the 2 year note has dropped 12 basis points to 0.76 percent. The yield on the 3 year note has dropped 11 basis points to 0.95 percent. The yield on the 5 year note has tumbled 9 basis points to 1.42 percent. The yield on the 10 year note has dropped 6 basis points to 2.07 percent and the yield on the 30 year bond has edged lower by just a basis point to 2.59 percent.

The 2 year/10 year spread widened 6 basis points to 131 basis points.

The 5 year weakened against the wings and the 2 year/5 year/30 year butterfly is 51 basis points.

Swap spreads, on balance, narrowed today. Two year spreads are unchanged. Five year spreads have narrowed one basis point. Ten year spreads narrowed 1 ½ basis points. Thirty year spreads narrowed 1 ½ basis points, too. During my holiday absence the 30 year spread normalized and is now positive 10.

Participants report that exotic desks that drove the hedging are on sides now.

Comments

[jmorace:]

High grade corporates seem to have rallied quite a bit. Do you think they still offer any value for the individual investor, especially in light of municiple bond prices?

Thanks for your thoughts.

jmorace

2008 Dec 30 10:44 AM