Bond Expert: Monday Wrap

Prices of Treasury coupon securities registered very bifurcated results as the first fully staffed trading session of the new year produced a rout in the long end. Investors returned from the holidays with the animal spirits racing and poured money from risk-free assets into riskier fixed-income assets.

The yield on the 2 year note declined 2 basis points to 0.80 percent. The yield on the 3 year declined a basis point to 1.07 percent. The yield on the 5 year note glided ever so slightly higher by 4 basis points at 1.69 percent. The yield on the 10 year note jumped 11 basis points and the yield on the Long Bond catapulted 24 basis points and sliced right through the 3.00 percent level to finish at 3.03 percent.

The 2 year/10 year spread widened 13 basis points to 168 basis points.

The 2 year/5 year /30 year spread closed the day at 45 basis points after opening at 27 basis points.

The flight from risk-averse assets into riskier and less liquid paper manifested itself in the Treasury market. I have chronicled here over the last couple of months the story of several off the run bonds which had become extremely cheap on the curve and instances of off the run issues that had had produced strange relationships.

As an example, the 8 1/8 August 2019 bond has traded as much as 70 basis points cheap to the 10 year note. The 10 year note is a November 2018 maturity and there is no reason why one should pick up 70 basis points for a three month extension. That spread narrowed 6 basis points today and has narrowed over the last several days to 57 basis points.

Then there is the story of the August 2023 bond and the November 2024 bond. The yield curve is positively sloped in which case rolling back on the curve should cause one to give up. Not so in the relationship between these bonds. That spread had been such that you could sell the 2024 and roll backwards to 2023 and pick 36 basis points. That spread is 28 basis points today.

If the Fed is serious about keeping the funds rate at zero (and they are), then these and numerous other anomalies along the Treasury curve will correct as yield hogs scour the curve for incremental value.

Money managers continue to buy MBS and paper is closing about ½ point tighter to Treasuries.

The Treasury and the Fed have just released updated proposals on the mechanics handling the fail problem in the Treasury market. I have not had a chance to read them and will not until later this evening. I will leave the three links below for those who wish to peruse the material, and I will try to comment tomorrow.

http://www.ny.frb.org/tmpg/pr090105c.pdf

http://www.ny.frb.org/tmpg/pr090105a.pdf

http://www.ny.frb.org/tmpg/pr090105b.pdf

Corporate bonds were on fire today. Spreads are ratcheting in as buyers emerge after a long period of hiatus. One salesman noted that 10 year and 30 year industrial paper has tightened 25 basis points to 50 basis points to benchmark Treasury debt in the last two weeks.Caterpillar Tractor 10 year paper traded T + 400 less than two weeks ago and is 360 bid today.

GE 10 year sector paper was in the 360 zone recently and is 325 bid today.

IBM 10 year paper has rallied from about 350 to 260 bid.

The IG 11 has widened 7 basis points to 205/208. The deleveraging process, I am told, made that instrument rich and as participants buy cash bonds the index will lag.

The only notable issuance today was by GE, which raised $10 billion with a four pronged deal which qualified for FDIC protection.

Comments

[Crocodilian:]

The 30 year at %3? Astonishing, given the massive issuance coming. From a taxpayer's point of view, let us hope that the Treasury sells as many of these as they possibly can-- to be able to borrow money in a currency that we can (and will) debase is a "gift of Mr Market" . . . a voluntary gift of purchasing power from bond buyers to the US Treasury

Jan 05 09:38 PM

[dawase@gmai...:]

If the buyer is the Fed... doesn't that mean we're still on the hook? Who else is buying at these ridiculous rates? Especially after factoring in the inevitable devaluation...

Jan 05 10:35 PM

[User 331841:]

Yes, isn't it nice that the Fed can shill bid on the Treasury's paper? On eBay you would be banned for such behavior.

Jan 06 12:56 AM

[Mick Weinstein:]

A great review as always, John.

Jan 06 02:21 AM

[Delojozafado:]

Warren Buffet gets 10% on GE preferred with covenants and less than 4% on GE senior debt is considered a good bet/deal? Let us contemplate the price of oil and say FCX-PrM 5 weeks ago. Now our "experts" tell us there is no inflation danger.... in this market/ Govt intervention situation. Oil $35/$48 FCX-M $33/$51. GE common still sells over 7% on the common dividend. It went nearly to 8% during the recent ex-div point. I would note the action in TBT over the last 5 trading days. Duh... Just when we are feeling safe to re-enter the water we find the 7 trillion in cash sitting on the side lines questioning the advisability of open ended mutual funds. With no intra-day stopping out on those many +5% down days we hate to recall in the last year, the open end mutual fund industry may just now languish. That leads us to examine ETFs and by extension those shaky CEFs. What are bond investors to do as long as these double and even triple leveraged ETFs like PST, TBT, some others by Direxion, are out there to spook and generate outside the norm moves in their underlying markets? What happens if/when this sideline money and hedge funds start dumping money into the ETF markets? I would rather own a BDF, ICB, or VBF bond fund. Take the +6% monthly or qrty instead of < 4% semi annually and put in some tight stop against the cost basis. Ten year debt? You are really going out on a limb. Especially with corporate debt if we emerge into a 650 S&P 500 level followed up with more of the same bond market action that has driven TBT up 16% in a week!

Jan 07 08:41 AM