Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities vaulted higher today as fears about the stability of the banking system and the efficacy of the stimulus package motivated buyers. Economic data as manifested by the Empire Survey highlighted the depth and severity of the economic contraction. The combination of all these factors drove the stock market into a deep swoon and that became another factor supporting the fixed income market.

The yield on the 2 year note dropped 9 basis points to 0.87 percent. The yield on the 3 year note declined 14 basis points to 1.23 percent. The yield on the 5 year note tumbled 19 basis points to 1.68 percent. The yield on the 10 year note plummeted 22 basis points to 2.67 percent. The yield on the Long Bond danced to the same music and fell 16 basis points to 3.51 percent.

The 2 year/10 year spread collapsed 13 basis points to 180 basis points.

The 2 year /5 year /30 year spread which it is my custom to follow widened three basis points to 92.

Maybe I am not talking to the proper players today, but I have not been able to discern any sector that might be a hotbed of activity. Several of my best contacts are off this week as many schools are closed for winter break. So my best digging efforts here tell me that the flow was mostly two-way and mostly light.

Some spoke of the package of securities which the Treasury will announce on Thursday when they will announce the 2 year, the 5 year and the debut performance of the 7 year note. I think they will bring $42 billion, $32 billion and $15 billion respectively. That would be $89 billion of coupons which would be record shattering. (Until next month.)

Federal Reserve Chairman Bernanke will speak before and answer questions at the National Press Club tomorrow at 1230PM New York time.

Agency spreads lagged in the rally and are 3 basis points to 5 basis points wider. Dealers reported robust demand in the 1 year /2 year sector. One veteran trader noted that it felt as if there had been a seller of that paper, as the sector was barely moving as the Treasury market rallied. Freddie Mac (FRE) announced a new 3 year note which will price tomorrow. The talk on the pricing is quite cheap at about 15 basis points behind the current one. One analyst thought that pricing would ensure a mega deal in the vicinity of $7 billion.

Swap spreads recovered from their worst levels of the day. The 2 year spread is 2 basis points wider at 71 ½. The 5 year spread is 4 basis points wider at 74. Ten year spreads are 4 basis points wider at 29. Thirty year spreads are actually a basis point tighter at NEGATIVE 31. I suspect that the slight recovery in spreads resulted from expectation that some of the corporate issuance would be swapped.

I have mentioned the corporate supply in earlier postings and the issuance appears to have proceeded well. The Roche (RHHBY.PK) deal is mega sized and will price tomorrow. One salesman said that the talk on the deal was for spreads around 300 basis points which for AA issuer with very little debt should move quickly.

Solid industrial names trade well as do other defensive names such as General Mills (GIS). Financial names and quasi financials took a drubbing. GE paper is wider by 5 basis points and Citi (C) and BOA (BAC) paper is wider by 25 basis points.

Comments

[Stock Marke...:]

Wow, the hit on financials other than C and BAC was undeserved and should rebound soon..

Feb 17 07:02 PM

[SW Richmond:]

There was some fuss Monday night about Polish bank troubles hitting the EUR/USD pair (as EU banks are over-exposed to eastern Europe, lots of debt to those countries denominated in Euro and CHF), and causing a flight into USD which 'might' have carried over into Treasuries today. You can see the spike in the USDX last night.

Feb 17 09:09 PM

[Kenny G:]

not really bad! :)

Feb 17 09:50 PM