Bond Expert: Wednesday Outlook

Prices of Treasury coupon securities have (mostly) staged a modest retreat in overnight trading as the market surrenders many of the gains attained following the announcement of the beginning of FOMC intervention in the market today. The yields on the 2 year note and the 5 year note did not post as substantial gains as the 10 year and the 30 year yesterday, but notwithstanding that, each has returned to preannouncement levels. The 10 year is within shouting distance of those levels (4 basis points) while the 30 year bond is still 11 basis points better than its worst level of yesterday.

The yield on the 2 year note is unchanged at 0.95 percent. The yield on the 3 year note has increased a basis point to 1.29 percent. The yield on the 5 year note has climbed 2 basis points to 1.75 percent. The yield on the 10 year note has edged higher by a basis point to 2.71 percent. The yield on the 30 year bond has increased 2 basis points to 3.66 percent.

The 2 year/10 year spread is 176 basis points.

The 2 year/5 year/30 year butterfly, which it is my custom to observe, is 111 basis points. When one adjusts for the roll on the new 2 year note, it is about 4 basis points cheaper than it was when I composed my closing piece yesterday.

This butterfly spread has retraced about 50 percent of the gains it achieved as a result of the Federal Reserve Quantitative Ease announcement last Wednesday. Trading was wild and volatile but that spread moved from 90 to 130 and sits in the middle now at 111.

Supply is the name of the game today as some supply comes in from the Treasury while the Open Market Desk will remove some with its first buyback.

The Treasury will auction $34 billion 5 year notes, which is probably the largest auction of 5 year notes since man learned to stand erect. The retreat in the market should make bidders wary, and with a 7 year note the following day I would expect this auction to tail a bit.

The Federal Reserve will enter the market and buy the 10 year part of the curve today as it begins the process of buying $300 billion of securities. If the process resembles the process in the Agency market, they do not reach for offerings. They respond to the supply offered to them but generally pay the offered side of the market or something quite close. There are no windfall profits for arbitrageurs here.

There is one notable piece of economic data today and that will be available in about an hour when Durable Goods should post another decline. The consensus expects a drop of 2.4 percent after a 4.5 drop in January.

Failed auction, U.K. - Several readers were kind enough to point this out.

IG11, IG12 and some CDS

5yr Senior Bank CDS: BAC 295/305 (+5), CITI 540/550 (+10), JPM 170/180 (+4), WFC 210/220 (+5)

5yr Senior Broker CDS: GS 255/265 (+3), MS 363/373 (+3)

CDS Index: IG11 226/227.5 (+1.5), IG12 186/187.5 (+1.5)

Comments

[Mr. Big:]

A comment from one of my contacts:

There was a failed auction - UKT4.25% 2049s saw 0.93 cover….

It was outside of the 5-25 year QE zone set up by the BoE….we saw a disastrous auction of 2014s previously which was too short to be eligible for the Bank's buyback programme. King's comments yesterday as regards perhaps not needing to use all of the £75bn they have allotted to fund the QE programme will not have helped. What this does show is the distortionary effect of specifically excluding certain sectors from the QE process. We suspect that they will ultimatey abolish these ranges. Nearer term, the bear steepening seen in the past two sessions exposes some considerable value across the curve given the Bank will not have to redouble its efforts on the QE front and, with their limitless pockets, it would be rash to be against them.

Mar 25 09:48 AM

[Mr. Big:]

some spelling errors in the above message, but I believe what he meant to say was "....exposes some considerable value across the curve, given the Bank will now have to redouble its effors on the QE front..."

Anyhow, do you believe US treasuries will run out of buyers too? Perhaps this year? Next 6 months?

Given the Fed intervention, I believe buyers may be priced out of refinancings as well... A lot of supply coming....

Mar 25 09:52 AM

[cyclingscholar:]

When the fed bought treasuries in late November TBond prices jumped by what...10 points, over a sustained burst of buying lasting two weeks or so.

Once that sucker rally ended..the fed has bought TBonds again...what have we got this time? A one day rally on suspiciously low volume and not much follow through.

So Far. :)

cyclingscholar

Mar 25 12:29 PM