Bond Expert: Monday Wrap

Prices of treasury coupon securities surged today as the thick residue of economic weakness made manifest in the labor report on Friday ignited buying of Treasuries.

In a sense, the Treasury purchases were a second-order move as sober reflection on the data and its import led to a rout in commodities, a selloff in financial stocks and generalized weakness in the equity market.

Atlanta Federal Reserve President Lockhart poured some gasoline on the flames when he raised the specter of Federal Reserve purchases in a lunchtime speech. Bernanke speaks tomorrow on the crisis and the response to it, and it will be instructive to see if he discusses the issue. The minutes of the December 16 FOMC meeting make no mention of any discussion of the mechanics of such purchases and it would be appropriate for the Chairman to shed some light on the topic. If he does not address the issue tomorrow, then it is a virtual certainty that he will at his February Congressional testimony.

The yield on the 2 year note declined 2 basis points to 0.73 percent. The yield on the 3 year note dropped 3 basis points to 1.08 percent. The yield on the 5 year note dropped 7 basis points to 1.44 percent. The yield on the 10 year note tumbled 9 basis points to 2.30 percent. The yield on the 30 year bond tumbled 8 basis points and breached the 3.00 percent level as it closes at 2.99 percent.

The 2 year/10 year spread narrowed sharply as it closed at 157 basis points.

The 2 year/5 year/30 year butterfly continues to richen and stands at 84 basis points.

Swap spreads are finishing the day mixed. Two-year spreads narrowed 2 basis points to 52. Five-year spreads are wider by a basis point at 52 ½ basis points. Ten-year spreads are unchanged at 13½. Thirty-year spreads inverted 5 basis points more and are now NEGATIVE 23½.

The Federal Reserve bought MBS again but they were the only buyers. End users have been noticeably absent as buyers the last several days.

Agency debt

The agency market was as quiet as the other markets today. However spreads continue to tighten. Two-year paper is tighter by a basis point. Five-year sector paper is about 7 basis points better and 10 year paper is about 5 basis points tighter. The Federal Reserve aided and abetted the nirvanic tone with the announcement that it would purchase 4 year through 9 year paper tomorrow.
Other factors have combined to keep the sector well bid. With rates this low there is $15 billion or so worth of paper eligible for call this week. In addition there is another $10 billion of notes maturing.

There is some supply as the FFCB has announced a 3 year note. There is also rumor that Home Loan will offer a global deal in the 5 year sector.

Corporate bonds

Corporate bond spreads as measured by the IG 11 have leaked 4 basis points to 5 basis points wider as it sits 207/209. Industrial bonds are firm and close to unchanged but financial sector paper has widened 5 basis points to 10 basis points. The potential union of the retail brokerage groups of Citibank (C) and Morgan Stanley (MS) has weighed on sentiment as the always-cynical suspect that Citi has something merdurinous hidden under the covers.

The new issue market is quiescent today with Staples' (SPLS) 5 year deal the highest profile offering extant. That troubled retailer has offered benchmark size and will probably be compelled to attach a coupon of between 9 percent and 10 percent to be successful.

The General Electric (GE) 30 year is T+ 400. Someone had told me earlier in the day that it was offered cheaper than the 400 basis point pricing spread. Ten-year GE paper is unchanged at 360/350.

Comments

[Jeff332:]

"merdurinous" ?

What you mean is "crap", right?

Jan 12 04:48 PM