Bond Expert: Tuesday Wrap

by: John Jansen

Prices of Treasury coupon securities gyrated about today and are closing with mixed results. The shorter maturities (2 year and 3 year) lost ground while the benchmark issues out the curve posted gains which ranged between smallish and modest.

The market developed an early bid which the green shoots in the Pending Home Sales data shot down. Prices declined and the curve steepened. I believe I clocked 2 year/10 year at 277+ at one point and the 10 year itself traded at nearly 3.72 percent.

At that juncture hedgers were in and MBS and swaps were widening. The market reversed sharply and the 10year is nearly 8 basis points better than its worst levels.

Why the turnaround? Well, the hedging ceased and another wave never materialized. Dealers also report that investors seem enamored of 10 year yields in the 3.70s and yield buyers were involved when the market was at those levels.

The yield on the 2 year note is a basis point higher at 0.95 percent. The yield on the 3 year note edged higher by 2 basis points to 1.48 percent. The yield on the 5 year note slipped a basis point to 2.51 percent. The yield on the 7 year note slid 2 basis points to 3.24 percent. The yield on the 10 year note declined 4 basis points too 3.63 percent and the yield on the Long Bond tumbled 5 basis points to 4.49 percent.

The 2 year/10 year spread is finishing the day at 268 basis points.

The 2 year/5year/30 year spread is 42 basis points. I clocked it as narrow as 39 basis points when the general market was at its worst levels.

Mortgage and Swaps

Swap spreads are finishing the day mixed. Two year spreads are tighter by 3 1/4 basis points at 44 1/2. Five year spreads are narrower by 2 basis points at 50 1/4. Ten year spreads are wider by one basis point at 33 1/4. Thirty year spreads are 1/4 basis point tighter at NEGATIVE 15.

Mortgages are unchanged versus swaps.

Corporate Bond Spreads

(3:00PM ET) Corporate bond spreads remain on fire today. Bank and finance paper remains tighter by 15 basis points to 20 basis points. Industrial names are 5 basis points to 10 basis points better.

The climate remains quite friendly and investors are still enthusiastic buyers. Bank and finance paper benefited today from the news that some firms were raising equity capital to satisfy the requirements of the groundskeepers in Washington who supervise the unrolling of the TARP.

I think there is an additional reason for the continued strong performance of financial sector names. Those names lagged in this rally and are now the last bastions of truly yieldy paper.

Here are some examples of some of the moves in non financial names over the last week. United Technologies (NYSE:UTX) 5 year paper has moved from 160 to about 130. IBM (NYSE:IBM) 7 5/8s 2018 has moved from 180 to 150. AT&T (NYSE:T) 5 1/2s of 2018 have gapped from 195 to 150.

There is a reasonably active new issue calendar today populated with names which don't issue very often - Schwab (NYSE:SCHW) and Chevron Phillips (NYSE:CVX). The issues are in good shape and investors are happy to participate.

Agency Debt

Agency spreads are tighter across the yield curve today. Two year and five year bonds are about 2 basis points tighter and 10 year paper is 3 basis points narrower.

FNMA (FNM) passed on offering a bond and they sustained the already sanguine supply / demand technicals.

One dealer noted that he has observed investors moving out the curve for yield as well as others showing interest in callable paper for the yield enhancement of that product.

The principal story in the agency market is supply and the lack thereof.

One analyst noted that the Home Loan System has let $250 billion of debt roll off since last November.

The Federal Reserve is in the midst of its much vaunted program to purchase $300 billion of securities.

And FNMA and Freddie Mac (FRE) are not issuing. One market participant described each of the GSEs as zombies in that they have been consigned to refi and loan modification duties.

Against that background there is no reason for either to be a significant issuer.

The Federal Reserve is expected to conduct a buyback this Friday.