Bond Expert: Thursday Wrap

Prices of Treasury coupon securities have taken a rather traumatic tumble this day as Tim Geithner conducted a 30 year bond auction and the invited guests failed to show up for the party. As I related in an earlier post the auction was a debacle and the price action since the result printed is worrisome.

The auction came with a 9 basis point tail. If you bought those bonds you would think that you had a huge cushion. That is not the case as all who own the bonds are now underwater.

This result is one of the reasons I dislike the bid to cover ratio statistic.The cover here was 2.14 versus a recent average of 2.05. That stat always fails to note where the bids lie. In this case they are miles from the market so who cares what the ratio is.

The yield on the 2 year note climbed 3 basis points to 0.99 percent. The yield on the 3 year note is 4 basis points higher at 1.47 percent. The yield on the 5 year note is 9 basis points higher at 2.14 percent. The yield on the 10 year note jumped 11 basis points to 3.29 percent. The yield on the Long Bond exploded 17 basis points to 4.27 percent.

The yield curve has exploded also with spreads dramatically wider. The 2year/10 year spread widened 8 basis points today to 230 basis points. That is a new wide for this cycle.

The 10 year/30 year spread traded at 100 basis points and currently rests at 98 basis points. That traded yesterday morning at 90 basis points.

The 2 year/5 year/30 year butterfly is 98 basis points. I think early this morning I had clocked it at 90 basis points which is support.

I am not sure what one does here. I have cogitated on trading from the long side but there are several factors which militate against that course.

The price action is ugly. There will be bonds for sale at every level above the market. The street and investors are long and very wrong.

Tomorrow is unemployment Friday. I am not sure if I want to carry a position through that number.

It is also rate lock Friday and for about ten Fridays in a row the market has chosen to sell off and has done that without the ungodly long positions which it is lugging at the moment.

For all of those reasons I think I will remain flat and take another look after the Labor Report tomorrow.

Separately, one trader has emailed that low coupon mortgages have sold off quite hard this afternoon and have given up about 8 ticks versus the 5 year Treasury.

My friend who dabbles as a technician sees support for the 10 year in the mid 330s. He is quite concerned that it did not have even a cup of coffee in the 3.25 percent neighborhood.

Corporate bonds are feeling the tiniest bit toppy.

MBS and Swaps

Mortgages are about 4/32 tighter to swaps.

The Federal Reserve has been a buyer of 4 1/2s and a buyer of middle of the coupon stack rolls.

Money managers have been better buyers of 5 1/2s and 6s.

Swap spreads have reversed course and are now mostly wider on the day.

Two year spreads are 1 3/4 basis points tighter at 44 1/2. Three year spreads are 1/2 basis points wider at 45 3/4. Five year spreads are 1/2 basis points wider at 51 1/2. Seven year spreads are 1 1/2 wider at 27 3/4. Ten year spreads are 4 basis points wider at 13 1/2. Thirty year spreads are unchanged at NEGATIVE 39 1/2.

My best source on the swap market has observed mostly receiving throughout the day. There was a wave of receiving after the auction results. He has not observed the subsequent paying which would have driven spreads wider.

Given the extent of the move, someone has sweaty palms and is paying.

Agency spreads (from 2:15pm)

Agency spreads are tighter across the curve. Two year spreads are about two basis points tighter. Five year spreads are 2 basis points tighter and ten year spreads have narrowed by 3 basis points.

The Federal Reserve has announced that they will purchase agency paper tomorrow and will buy bonds which mature between Nov 2015 and July 2032.

One analyst notes that the last two weeks represented a unique period in which the Treasury was issuing massively and the GSEs issued nada.

That reverses the next two weeks as the Treasury takes a brief hiatus and the GSEs come to market. The analyst with whom I spoke counsels that investors should be taking some profits on agency paper and seeking alternatives.

He noted that sovereign and supra paper is quite cheap to agencies. By way of example RBS (RBS) just sold $7 billion of 3 year paper which the Queen of England vouchsafes is quite safe. (It is guaranteed by the UK in case my attempt at very dry humor falls short.) It trades around T+125. Three year agency paper trades around T+ 36.

That seems like a compelling place to park some money after the long run in agencies.

Comments

[mkt-student]

JJ,
i mentioned this Bloomberg summary note in another post yesterday.
is this apparent huge plunge in overall volume a real concern here?
are mkt participants wondering "how big is Ben's bid"?

.....bloomberg.com/apps...

......Trading volume has fallen even as supply has increased. Trading in Treasuries this year has averaged $175 billion a day, according to ICAP Plc, the world’s largest inter-dealer broker. Not a single day has seen $300 billion in Treasuries change hands this year, compared with last year’s daily average of $301.8 billion. The 200-day moving average, used by some technical analysts to judge longer-term trends, has fallen to $221.4 billion.
“Trading volumes have been on the decline since last fall despite a huge surge in issuance,” wrote UBS Securities LLC strategists led by Chris Ahrens. “It may result in supply being distributed in larger blocks requiring greater price discounts.”.............

2009 May 07 05:00 PM

[Bill Zielinski]

Nice article. The flight to safety seems over and with very low yields and everyone long, not much reason here to own treasuries. It will be really interesting to see the Fed's response here, as the Treasury tries to sell an endless supply of new paper.
A trade in the TBT looks like a good bet here.

2009 May 07 08:06 PM

[Bill Zielinski]

Nice article. The flight to safety seems over and with very low yields and everyone long, not much reason here to own treasuries. It will be really interesting to see the Fed's response here, as the Treasury tries to sell an endless supply of new paper.
A trade in the TBT looks like a good bet here.

2009 May 07 08:06 PM

[John Jansen]

I am looking for a spot to get long for a trade. The Treasury is on hiatus for two weeks so that supply demand dynamic favors owning bonds at these levels.

2009 May 07 08:42 PM

[whidbey]

This may be just a preview of the problem confronting a recovery in the US economy: high or higher interest rates becoming unmanageable. (where is Bill Gross's strategy to follow the fed's lead any buy the support!)

The stress tests seem to have missed the one institution that is likely the most stressed: the Fed/Treasury combo, and just fraught with danger to the economy. And..did you notice?

Today the Chinese bankers registered their displeasure, suppose anyone heard?

2009 May 07 08:44 PM

[been there]

will the fed raise rates to 12% when unemployment is 12% and inflation is12%. what a cluster!!!! this is going to be.

2009 May 07 10:25 PM

[MarkitWacha]

I noted that the Chinese have dropped their buying from $155 bln to $7 bln or thereabouts.

I think we're in a harmonic series that is almost completely dependent upon what the long bond does for mortgages. Lower yield = boom times. Higher yield = bust.

2009 May 08 01:06 AM

[Willy Walnuts]

just musing... when Geithner says, "This is just the beginning and we are going to keep working to try and make sure this financial system is in ... a strong enough position so it can provide the credit necessary for recovery," is he really talking about the banks extending credit to the Treasury?

The Treasury bails out the banks, the Fed bails out the Treasury, what's the next leg in the plan? Will the Fed require the banks to increase holdings and reserves in treasuries?

To go a bit further... what about the rumor of pensions and retirement accounts being seized? Will these become compulsory investments in treasuries?

It looks like they are going to have to do some aggressive marketing... they can't expect Ben to become the only buyer trying to keep interest rates down, while all the others fall out.

2009 May 08 01:17 AM

[LKofScotland]

never underestimate the ability of Uncle Sam to borrow at outrageously low interest rates. Sure nobody wants our paper. The trucks are suddenly clearing out of the truck stops, though. And who else is going to feed planet earth? The Russians? Yeah, right.

2009 May 08 01:30 AM

[Liebold]

The trucks are "... clearing out of the truck stops ..." because there's nothing to haul, freight rates are in the basement, and/or they're being repo-ed. China might not like taking a haircut at gun point, but if they want cheap oil, they'll hold dollars. We still "own" the world's value assets - Saudi Arabia, Iraq, the US Navy, and Rayethon.

2009 May 08 07:02 AM

[msgtb]

The Chinese and Japanese are going to support a new Asian Monetary Fund (AMF). That way they will have more control over the financials in their area. This will help other Asian Counties also which have been burned by the (IMF). Folks it is going to be payback time. Why should Japan and China throw their money down a deep dark hold called the US debt without getting a 10 or 12 % yield. The American people will learn to save and not spend what they don't have like the Asian people or we will be very sorry.

Dave

2009 May 08 02:44 PM