Bond Expert: Friday Wrap

May. 1.09 | About: BB&T Corporation (BBT)

I am writing my close early today (3:04 pm) as I am busy being father, father-in-law, husband and grandfather.

Prices of Treasury coupon securities sagged again today in a session marked by light trading activity. End user investors were hunkered down in the deep weeds and most of the action was street traders shooting taxpayers in the big toe ahead of the issuance next week.

Against that background the yield curve steepend again and the 10 year and 30 year sectors suffered the biggest hit.

The 2 year/10 year spread steepened 3 basis points to 226 basis points. In the moments before the announcement of the statement which concluded the FOMC on Wednesday, that spread was 208 basis points.

The 2year/30 year spread has widened to 317 basis points in that same time frame.

The Treasury is an issuing machine and in order for that paper to float successfully the street needs a stratagem. Right now the idea is to sell whatever the selling next and the plan seems to be working.

Th yield on the 2 year note has increased 2 basis points to 0.91 percent. The yield on the 3 year note has climbed just a basis point tto 1.37 percent. The yield on the 5 year note has edged higher by 2 basis points to 2.03 percent. The yield on the 10 year note jumped 5 basis points to 3.17 percent. The yield on the Long Bond climbed a similar amount to 4.08 percent.

Corporate bond spreads are virtually unchanged and there was little trading in that market.

Among noteworthy items of issuance from this week, the 10 year BB&T (NYSE:BBT) deal is 410/400 which is back about 20 basis points from issuance levels,

Swap spreads suffered the slings and arrows of outrageous fortune today. There was a round of paying by convexity types which pressured spreads wider.

Two year spreads are 2 basis points wider at 58 1/4. Five year spreads are 3 1/2 basis points wider at 58 1/4. Ten year spreads are 3 1/2 basis points wider at 13 2/4. Thirty year spreads are 5 basis points wider at NEGATIVE 36 1/4.

Mortgages were weaker earlier but have rebounded on money manager buying of 4s and 4 1/2s.

Agency market

Agency spreads are 3 basis points tighter in the 2 year and 5 year sectors and 4 1/2 basis points tighter in the 10 year sector.

The Federal Reserve purchased $ 3.3 billion of paper in the 2013 through 2015 bucket.

Agency issuance is down sharply and the Federal Reserve continues on a buying spree.

One analyst noted that in the world of bullet paper which is eligible for purchase by the Federal Reserve, that institution holds 13 percent of the pool already.

There is some discussion in the market that the pace of Federal Reserve purchases may slow a tad as spreads are so narrow already. Two year spreads are at 35 and 5 year spreads are at 50.

If one wishes government guaranteed paper there are much cheaper alternatives.

There is French government paper in dollars with 5 year final which trades at T+ 150. Netherlands-guaranteed and UK-backed paper is similarly cheap. If agency paper remains at current rich levels some investors will flock to the alternatives.

From earlier today: Negative Repo

Subject: Negative Rate Treasury Issues for May 01.2009

Today is the first day of the TMPG’s 300 basis point fail penalty. Just
to recap, if you fail to deliver any US Treasury securitiy today and going
forward, you will incur a 300 basis point penalty, payable at the end of the following month (June 30 for May 2009 fails). Given the record low level of short term interest rates, the Treasury was concerned that market participants could/would short unlimited quantities of UST’s with minimal impunity. This penalty consierably raises the cost of running short positions
and greatly reduces the potential for prolonged fails.

The main consequence from a repo trading perspective is negative rate
trading. From today going forward, we will list the issues which traded at negative rates, their range, the low print and their 10:00 average.

UST Security Range
Low Print 10:00 Average

Old 5 yr 1 3/4 03/31/14 - 0.75 / 0.00
-0.75 - 0.31
Ct 10 yr 2 3/4 02/15/19 - 0.25 / 0.20
-0.25 + 0.09
Old 2 yr 0 7/8 03/31/11 - 0.05 / 0.15
- 0.05 + 0.03
Old 7 yr 2 3/8 03/31/16 - 0.05 / 0.10
- 0.05 + 0.06

The preceding was produced by a dealer repo desk.

Sorry for the abbreviated work today.