Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities continued with the trend that had begun in overnight trading, and posted solid gains in the shorter maturities while longer dated issues languished. There was a collective epiphany that the selloff in the front end the last several days was exaggerated, and, given the likely course of monetary policy in the short term, yields were too high.

So there was an influx of buyers, and yields on short term instruments tumbled. The yield on the 2 year note clawed its way back to 1.29 percent as it slid 11 basis points. The yield on the outstanding 3 year note declined 9 basis points to 1.87 percent. The yield on the 5 year note dropped 7 basis points to 2.85 percent. The yield on the 7 year note fell 5 basis points to 3.51 percent. The interest yield on the 10 year note edged lower by 2 basis points to 3.86 percent. The Long Bond bucked the trend and posted a yield gain of 4 basis points.

The 2 year/10 year spread is 9 basis points wider at 257 basis points.

The 2 year /5 year/30 year spread richened in the up market and trades at 24 basis points after closing yesterday at 17 basis points.

I believe that VAR police are on active patrol at most trading houses and risk aversion is the order of the day. Markets have been very volatile and that volatility makes big positions career threatening and unnecessary.

Against that background, I expect that traders will occupy themselves over the next 24 hours by cheapening the 10 year note for the auction tomorrow. I do not think that there is risk appetite for owning the security outright and, consequently, it will require a healthy curve concession.

One trader did note that the short position in the 10 year note is massive at the issue trades at NEGATIVE 2.70 in repo, and has traded expensively for about three weeks. (For the uninitiated, repo is the transaction in which one who is short borrows the security to effect delivery. It is only since May 1 that the Treasury has seen negative repo rates.) It is hard to believe that the short should be so painful as there are $22 billion of these things today and after the creation of the new batch tomorrow there will be $41 billion. The folks at the Treasury will reopen the issue one more time in July at which time there will be about $60 billion of these things.

That makes me a little nervous as I will be drawing Social Security checks when that $60 billion bill comes due in May 2019 and it will be a helluva refunding, for sure.

Corporate bonds

Corporate bond spreads are quite firm once again. On balance, spreads are about a nickel tighter. Customers remain better buyers and as spreads have contracted there is an increasingly small space in which buyers can get yieldy quality paper. One salesman noted some interest in TMT paper as it has been a sector that has lagged in the rally. He had observed some investor interest in VZ paper which still trades around + 200 in the 10 year sector.

The new issue calendar is light. The highlight there today was $900 million from Andarko in 5 year, 10 year and 30 year tranches. The talk is 295, 325 and 335, respectively.

There was also some governmental issuance with KFW (I think a 10 year there) and $4 billion 5 year notes ( I am sure) from Ontario.

Sources believe that the pace of issuance will increase as we move through the week.

Comments

[Macro_Man:]

The repo point is very interesting...it is a very crowded short...and when it unwinds gonna be painful. I have bought a lot of TLT today....long Treasuries sold off today just as you said. Also bought put protection to be on the safe side, puts are not expensive at the moment.

Not sure what the trigger for the Treasury rally will be...but 30yr futures are bouncing off support at 112/113 area. If the support holds, that could trigger a nice rally and a short squeeze.

Jun 09 04:26 PM

[tunaman4u2:]

The propping up of the market continues... good cheer getting people out of treasuries to buy stocks. You're calling an end to the rally. Good luck bro, I'm with you in spirit


On Jun 09 04:26 PM Macro_Man wrote:

> The repo point is very interesting...it is a very crowded short...and
> when it unwinds gonna be painful. I have bought a lot of TLT today....long
> Treasuries sold off today just as you said. Also bought put protection
> to be on the safe side, puts are not expensive at the moment.
>
> Not sure what the trigger for the Treasury rally will be...but 30yr
> futures are bouncing off support at 112/113 area. If the support
> holds, that could trigger a nice rally and a short squeeze.

Jun 09 06:13 PM