Bond Expert: Tuesday Wrap

Prices of treasury coupon securities gyrated about today and are closing with miniscule mixed changes. There was some rate lock unwinds (I am told) and significant receiving in swaps which would have fostered the recovery in Treasuries from the lower levels that prevailed earlier in the day.

Some of the receiving in swaps is in anticipation of future receiving. FNMA (FNM) is expected to price $5 billion 5 year notes tomorrow. That issuer generally receives at issuance and so some of the receiving is probably front running of that transaction.

Another participant noted that Standard Chartered (LSE:STAN) is issuing in the 5 year sector tomorrow and the belief is that deal will also be swapped.

The Federal Reserve bought $6 billion of May 2012 through August 2013 paper this day. That was less than the $7 billion they purchased last time.

There are some analysts and traders who see the reduction as bullish and a sign that the Open Market Desk will focus more on longer dated maturities.

The logic is that the front end of the market is tethered and pinned by the ZIRP and needs less assistance . The argument holds that the Federal Reserve should spend its efforts where it would be most beneficial and that would be in the longer maturities.

The yield on the 2 year note is unchanged at 0.88 percent. The yield on the 3 year note is also unchanged and rests quite comfortably at 1.34 percent. The yield on the 5 year note is a basis point lower at 2.01 percent. The yield on the 10 year note is unchanged at 3.17 percent and the yield on the Long Bond was 2 basis points lower at 4.16.

The 2 year/10 year spread is 229 basis points.

The 2 year/5 year/30 year spread is a basis point narrower at 102 basis points.

MBS, Vol and Swaps

Mortgages are about unchanged to swaps today. Higher coupons outperformed their lower coupon cousins by a little bit.

Swap spreads marched tighter. Libor set lower and that set the tone for the 2 year and 3 year sectors. Two year spreads are 2 1/4 basis points narrower at 45. Three year spreads are 3 basis points tighter at 47 1/4. Five year spreads are 2 3/4 basis points tighter at 48 1/2. Seven year spreads are 3 1/2 basis points better at 25 3/4. Ten year spreads are in single digits at 9 3/4. Thirty year spreads are 1 3/4 basis points tighter at 43 3/4.

There was chunky receiving in the belly of the curve in what one participant described as a duration grab.

Swaption vol was mixed. Structures which expire in a year or less were a bit softer while stuff with longer expirations improved a tad.

A regular reader recently inquired about a regular posting on some benchmark vol indicator. So here we go. Three month into 10 year straddles would cost 483. 3 basis points today.

That represents the purchase of an at the money receiver swaption and an at the money payor swaption on 10 year swaps. The buyer is long puts and calls with at the money strikes on 10 year swap rates. The expiration of the option is three months hence the 3month into 10 year straddle appellation.

Corporate Bonds

Corporate bonds are unchanged to a nickel wider today. Secondary market trading has slowed considerably as participants digest the $12 billion or so bonds which hit the market yesterday.

The premier deal yesterday was the Microsoft (MSFT) and each tranche is better bid. The five year tranche is 87/82 and the ten year and thirty year slices are 100/95 the pair.

The other issuance from yesterday is mostly hanging around issuance levels.

One salesman noted a change in the climate in that there has been more bid requests from customers the last few days. He has seen an increasing amount of bid requests on solid names which have performed well over the last month.

So by way of example he cited Hersheys (HSY) 2013 bonds, McDonald (MCD) 2019s, Diageo (DEO) Jan 2013s and Disney (DIS) 2019 paper. This paper has tightened as much as 100 basis points over the last month and some happy holders were busy taking profits and seeking safe ground.

Comments

[Larry House:]

Thanks, John. Are you suggesting in your final comment that these corporates are NOT safe ground?

May 12 05:00 PM

[cannedpawn8:]

Good report John. Interesting.

May 12 05:49 PM

[John Jansen:]

Canned pawn,

are u chess player?

Larry,

I think they are only " unsafe" in the sense that they might be entering a patch where they underperform Treasuries.

They have just passed through a period of outperformance and some of those trades are being unwound.

I have no problem with the ability of the recent issuers to pay off at maturity.

May 12 06:03 PM

[Macro_Man:]

With the GM and Chrysler shut downs, the economic data over the next several weeks starting from late May could look a lot worse than consensus. If that were the case do you think TLT would be able to maintain its price or rally? It looks like there is no one (other than me) who is positive on the long bond

May 12 06:45 PM

[mkt-student:]

through their QE program the Fed has been buying across the curve the past +30 days, all the way down (price). does anyone run a program to see how much they are "offside" on their +$100 million that they have have spent thus far?

May 12 07:49 PM