Bond Expert: Thursday Wrap

Prices of Treasury coupon securities are closing the day with bifurcated results. The yield on the 2 year note has edged higher by 2 basis points to 0.83 percent. The yield on the 3 year note edged higher by 2 basis points also to 1.18 percent. The 5 year was the superstar of the day as its yield declined 6 basis points to 1.60 percent. The yield on the 10 year Treasury fell, but not as much as the yield on the 5 year as the yield fell 5 basis points to 2.45 percent. The yield on the 30 year bond is unchanged at 3.04 percent.The 2 year/10 year spread narrowed 7 basis points today to 162 basis points.

The 2 year/5 year/30 year butterfly finished the day at 67 basis points. I believe I clocked that Monday morning around 30 basis points.

Why has the belly of the Treasury curve performed so well? I think that it is the huge buying in spread product which in one form or another motivates a subsequent Treasury market transaction as a hedge. Buying in mortgages has been huge, and swap receiving would be heaviest in the 5 year and 10 year sector to hedge those transactions.

The Treasury did auction $16 billion of 10 year notes (with the reopening they are actually 9 year 10 month issues) and investors accorded the issue an enthusiastic reception. The auction average was 2.419 percent and that was more than 2 basis points rich to where the issue was freely available in the cash market.

Swap spreads remained narrow. Two-year spreads finished the day 6 ¼ basis points tighter at 56 ½. Three year spreads are at 53 ¼ and are 5 ½ better today. Five year spreads are tighter by ½ basis point at 49 ¾. Ten-year spreads are better by 6 basis points at 14. Thirty-year spreads are tighter by 9 ¾ basis points and are closing at a ludicrous NEGATIVE 15 ¼.

Mortgages are a tick tighter to swaps. There was some selling today by some investors looking to lock in gains, so the flow was somewhat more balanced.

The Federal Reserve Bank of New York in its regular weekly release detailed its mortgage purchases of the last three days. They bought a little over $10 billion in securities.

Corporate bonds

Corporate bond spreads are unchanged today but the tone remains quite firm. There was one new issue a $1billion 10 year deal by Walgreens (WAG). The issue priced at T+ 287.The GE 30 year which priced the other day at 400 is 400 /395 and I will wager that the offerer can not hit the bid.

One of my favorite issues, the Amex August 2013s, are 460/440. That issue actually traded in the 800 zone.

Agency market

Agency spreads are tighter by three basis points in the 2 year sector and 4 basis points in the 5 year sector and 10 year sector. FNMA (FNM) successfully offered $6 billion 3 year reference notes which priced at T+83 basis points. Freddie Mac (FMC) earlier in the week successfully priced 2 year and 5 year benchmark notes. So in that regard it was a good week for the conservatorship cousins.

One analyst with whom I spoke noted that real end-user retail has returned for now to the agency market. The Freddie deal had a high level of participation from banks' money managers and insurance companies. Asian participation was light.

However, the strong participation from real American clients seduced some Asian accounts into the FNMA 3 year, and that geographic sector was well represented in that issue.

The Federal Reserve announced that they will purchase 2 year and 3 year agency paper tomorrow. They have been averaging about $3 billion on each visit to the market.

The Home Loan banks are under a bit of a cloud today. Moody’s issued a report which questioned the capital adequacy of the system and said that in a worst case scenario many of the banks might end up in a conservatorship.

There was also a rumor floating about that the Federal Reserve would assume control of Home Loan Atlanta, and PIMCO would manage that portfolio. (Pretty soon PIMCO may assume control of the Across the Curve portfolio.)

Comments

[xom-only:]

if you knew that within the next 18 months the interest rate for 30 yr mort would be under 3.5, what position would you take now that you would not be able to change untill the target was hit??

Jan 09 08:27 AM