Bond Expert: Friday Wrap

Prices of Treasury coupon securities are registering solid gains today but have retreated from their best levels as the equity market rebounded from its worst levels.

The yield on the 2 year note declined 6 basis points to 0.93 percent. The yield on the 3 year note dropped 7 basis points to 1.30 percent. The yield on the 5 year note declined 5 basis points to 1.82 percent. The yield on the new WI 7 year note stands at 2.49 percent and is 7 basis points lower on the day. The yield on the 10 year note dropped 7 basis points to 2.78 percent and the yield on the Long Bond tumbled 11 basis points to 3.56 percent.

The 2 year/10 year spread narrowed a basis point to 185 basis points.

The 2 year /5 year/30 year spread cheapened 3 basis points to 85 basis points.

Retail activity in the Treasury market was subdued but one bond trader noted that he had several end users poking around at the peak of the zero curve in 2028 through 2030. You can lock in a stellar yield of 4.03 percent for about 20 years.

Tips have garnered a bid recently. At the middle of last year the breakeven on the 10 year TIPS was 250 basis points. By year end the breakeven was about 6 basis points. Over the month of January TIPS outperformed nominal bonds and the spread has reached 117 basis points.

That would be inline with the move above $1000 in the price of gold today. Central banks are doing their handiwork of reinflating the economy. That is proper and justified by real world events. But the reaction in the gold market and the TIPS market is also proper and those markets are betting that the central banks and governments will over stimulate, setting up a bout of inflation several years from now.

Corporate bonds

Fear of financial doom dominated the corporate market today and most of the week. Citibank (C) and B of A (BAC) have been the twin poster children for the malaise which grips the market. Citi and B of A paper has widened about 50 basis points today after widening about 50 basis points yesterday. Over the course of the week they are each about 150 basis points wider.

Five year Citibank paper is quoted 750/700 and 5 year BOA paper is 625/575.

I do not have quotes but the carnage extends to JPMorgan (JPM) and Wells (WFC) which have each widened by 60 basis points the last two days.

One corporate bond salesman who is a friend of the blog thinks that the action in the market this week has erased most of the progress attained since mid November.

He notes that the Private Export Funding Corp brought a deal to market this week which got lost in the sturm and drang of the Roche deal and the histrionics surrounding nationalization of the banking system. I should note that Pefco paper is full faith and credit of the US government.

They began with pricing talk at T +120 which is 45 basis points to 50 basis points cheap to where 10 year agency bullets were trading. By the time the deal priced on Thursday the issuer needed to offer a spread of +160 to complete the transaction. So a full faith and credit piece of paper about 85 basis points cheap to agencies.

In a normal and efficient market that would never happen and could never happen.

Agency spreads (from 2pm)

Agency spreads are mixed today with no major themes apparent. One trader who is a fast friend of the blog notes that he has observed good demand in the 3 year sector as supply this week in the sector cheapened it appreciably. The 3 year Freddie (FRE) which priced earlier in the week at 88 is now 80 bid.

He also made the observation that the agencies have been busy calling bonds and those owners need to replace that which they have surrendered to the issuer. That dynamic tends to keep the sector better bid than it would be otherwise.

On the negative side there was a Bloomberg story (which I am unable to link) which noted that Asian demand had declined as investors sought a full faith and credit guarantee for the GSEs similar to the protection afforded to bank paper by the FDIC.

Comments

[Wesley Mouch:]

Thanks for the summary John. Your daily reviews are always appreciated.

John notes that the Gold and Tip markets are reacting to inflation expectations. With this general tone, the pricing action on the long end of the treasury curve shows that the Fed is getting effective results in its previous commentary regarding future purchases for rate suppression. There does not seem to be evidence that the FED has started purchasing 30 year bonds. How long will the implication of future prices suppress the long bond rate?

Feb 21 05:15 PM

[cannedpawn8:]

Yes, appreciate the updates an comment. I am an OTB chessplayer also here in OK.

The Berry bros out of Stillwater held the US Men's and Women's Chamioships in 07.

Skip

Feb 21 05:58 PM

[Mad Hedge F...:]

Wells Fargo Bank (WFC) has been in a free fall for the last two weeks, as investors bail out of the stock in fear of nationalization, or an Alt-A loan loss driven bankruptcy. The stock has vaporized 47% in three weeks, down to a new 12 year low. Veloceraptor like hedge funds have been major short sellers of the stock because it is one of the last banks with any meat still on the bone. Demand for out of the money puts is soaring. The stock is being dragged down further by big selling of bank and financial ETF’s, like the Financial Select Sector SPDR (XLF), which has WFC as its second largest holding at 8.74%.

Feb 22 12:01 PM