Bond Expert: Wednesday Wrap

Prices of Treasury coupon securities surged today following a 10 year note auction in which the dealer community overwhelmed the best interests of the taxpaying public and purchased bonds at very cheap levels. (Which is one you are supposed to do when the issuer is delirious and you know the spigot will remain open gushing more supply.)

The yield on the 2 year note declined just a basis point to 1.02 percent. The yield on the 3 year note declined 3 basis points to 1.44 percent. The yield on the 5 year note drooped 5 basis points to 1.95 percent. The 10 year was the best bond of the day and its yield fell 9 basis points to 2.92 percent. The yield on the 30 year bond fell 6 basis points to 3.66 percent.

The 2 year/10 year spread narrowed 8 basis points to 190 basis points.

The 2year/5year/30 year spread richened from 71 basis points to 78 basis points.

The 10 year auction came at the cheapest point of the day and stopped just in front of support. Several technicians with whom I converse had pencilled in 3.05 as support, and a breach of that level would have them looking for a 3.25 percent 10 year note. Alas, it shall not happen, at least not now.

The failure of the market to break down precipitated a round of short covering which gave the market a grinding bid.

Subsequently, a mortgage-related account received in very large size in the belly of the swap curve and the hedging of that transaction pushed the 10 year to the low 2.90s. Essentially, most of the active players are trading the supply from the short side and today they got scalded.

Tomorrow is the final leg of this series of auctions as the week concludes with the reopening of the Long Bond for $10 billion. Today’s price action makes the bond a little less alluring and we will probably see some real sloppiness tomorrow.

Corporate bonds are unchanged in industrial names and 5 basis points to 10 basis points tighter in financials.

The mood of the market is much improved and there is reasonable two way flow.

Disney was offering a 10 year bond today about 40 basis cheap to outstandings at T+ 2 5/8.

The Boeing (BA) and Halliburton (HAL) deals from yesterday are 5 basis points to 15 basis points tighter.

3PM Reports

Agency debt

Agency paper is mixed today. Two year sector is tighter by a basis point and three year sector paper is unchanged. Five year paper is wider by 2 basis points and 10 year paper is tighter by about 2 basis points.

I previously mentioned supply in the 5 year sector. The price talk of T+ 91 is about a 10 basis point concession to the market.

Traders noted that the recent back-up in the market had led to some real account buying. One trader noted outright buyers in the 3 year through 5 year sector and another noted sellers of 1 year sector paper extending in to that sector also.

Comments

[samwise:]

Still think the Fed is going to monetize this sucker? Clearly we're going to have a run on the dollar--did it start today? Having listened to "helicopter Ben" yesterday he started sounding more like "door-gunner Ben" to me. I have visions of the cartoon "the Far Side" when I think of the size of the offerings soon to be. The one with the bear pointing at the clueless other bear saying "shoot him" comes to mind. Especially now that that boob (can I call her that?) Nancy Pelosi is already calling for stimulus--what number are we on now? Number 10?

Mar 11 05:35 PM

[Hari Seldon:]

The USD's strength (and to a lesser extent the EUR) reflects the world's trust in our institutions and property rights. The first thing a newly minted Chinese millionaires does is make sure he moves some assets into USD assets. He knows that, at the whim of a bureaucrat his wealth could be confiscated with almost no recourse. Believe it or not, the fact is that there is no better place to store your wealth right now (outside of maybe hard metals but that is a topic for another thread).

There are only two solutions to a declining value in levered assets: (1) Default or (2) Self-created inflation. I, personally, am betting that the reasonably intelligent and educated people in power realize this and not only the US but countries around the world will start running their printing presses in order to (a) return the banks to solvency and (b) deleverage their populace without requiring a major change in consumption or lifestyle habits.

As a percentage of GDP, the US debt load (both government and total) is not out of whack. In fact, the UK, Spain, Greece and Italy are definitely more indebted and eastern Europe is in the same place Latin and South America have been since I can remember (short a foreign currency).

I'm not convinced the US looks so bad. Every country is going to run the printing presses, and our institutions and systems have "safety value".

Mar 11 06:56 PM

[SW Richmond:]

Hari Seldon said:

"...at the whim of a bureaucrat his wealth could be confiscated with almost no recourse."

"There are only two solutions to a declining value in levered assets: (1) Default or (2) Self-created inflation."

"I'm not convinced the US looks so bad. Every country is going to run the printing presses, and our institutions and systems have "safety value"."

So our safest-haven choices are the ones who will default or inflate away our assets the least, and who won't point a gun at our heads and outright seize all of them?

Sweet! That's my kind of safe haven! What a great country! We've lost 50% in the stock market, and now we'll lose another 50% of what's left to inflation and default, but we're grateful we still have some left!

The US dollar is the floatiest turd in the fiat sewer! Woo Hoo!

Mar 11 07:14 PM

[Hari Seldon:]

SW

Not saying I disagree with you that it is a unpalatable situation but it is what it is and you should make decisions appropriately based on what IS going to happen, not what we would LIKE to happen.

Mar 11 07:19 PM