Bond Expert: Thursday Wrap

Prices of Treasury coupon securities surged today as investors flocked to the bond market and the prospect of 4 percent 10 year notes and 30 year bonds trading behind 4.75 percent.

There are a litany of reasons for the change of heart by investors.

The MBS market is an appropriate place to begin as it led the market lower. The convexity hedging from that quarter has abated, and many think that it is over for now. There is also a supply factor in that the recent rise in rates augurs for a decrease in supply as less mortgages are created. And then there was the story I referred to in an earlier post about indexing and the inclusion of low coupons in the index. That prompted buying.

There is a seasonal factor in play here also as June has posted the high yields on Treasuries several times in the past few years.

The Treasury will be on an issuance hiatus for awhile. There should be about a two week interval in which there is no coupon supply.

I think it is also important to note that six months ago the 10 year Treasury yielded a parsimonious, paltry and impecunious 2 percent. We have doubled its yield as it tumbled to 4 percent. Whatever one thinks, that is a significant adjustment and one that should give investors reason to reflect.

At the same time sentiment in the equity market has shifted and life is wonderful in that venue. The S&P is nearly 300 points off of its lows and is priced for financial nirvana and perfection. Some have looked at the relative values of equity and bonds and stocks and are concluding that it is time to take some chips off the table in stocks and place some money in bonds.

The yield on the 2 year note declined 4 basis points to 1.31 percent. The yield on the 3 year note also declined by 4 basis points to 1.95 percent. The yield on the 4 year note tumbled 8 basis points to 2.84 percent. The yield on the 7 year note fell 11 basis points to 3.47 percent. The yield on the 10 year note slipped 9 basis points to 3.85 percent. The yield on the 30 year bond declined 8 basis points to 4.69 percent.

The 2 year/10 year spread narrowed 7 basis points to 254 basis points.

The 2 year/5 year/30 year spread is 32 basis points. Earlier in the week it was as narrow as 17 basis points.

Swaps and MBS

It has been a wild and volatile day in mortgages. At the moment FNMA (FNM) 5s are about 5 ticks better to swaps.

There has been a huge down in coupon trade and that has caused significant movement. As we speak the FNMA 4s are 15/21 tighter to swaps whilst the FNMA 6 1/2s lagged swaps by 9 ticks.

As I compose this piece I am receiving messages via email that mortgages are well off their best levels as sellers have emerged.

I think the takeaway is that while there may be some sellers, the mood has turned and many investors think it is okay to wade into the mortgage inferno. There was broad based buying from bank portfolios, money managers, and hedge funds today.

The low coupons began the day with a bid, but an announcement from Barclays (BCS) was the catalyst for additional buying.

Barclays inherited the Lehman indices against which many portfolios index or measure performance. Barclays announced today that the mortgages which the Federal Reserve owns will be included in the index. Apparently, many thought those bonds would not be, and many investors were instantly underweight the 4 and 4 1/2 coupons and that was the catalyst for a round of buying.

Swap spreads are tighter across the curve. Two year spreads are 1/4 basis point tighter at 46 1/2. Five year spreads are 1 1/4 basis points narrower at 53 1/3. Ten year spreads are 3 1/2 basis points tighter at 35. Thirty year spreads have narrowed 3 basis points to NEGATIVE 19.

Agency Market

Agency spreads are tighter across the yield curve. Two year sector paper is narrower by one basis point. Five year paper is better by 3 basis points and the ten year sector narrowed by 2 basis points.

The Open Market Desk announced that it would intervene in the market tomorrow and buy June 2013 through November 2015 paper.

The Federal Home Loan System priced a large 2 year deal at T+32 and the issue is now 29 bid.

Traders reported light activity as investors focused energies on the Treasury market circus.

Corporate Bonds

(2PM ET): Corporate bonds are on fire, as they have been for some time. Spreads are better by 5 basis points to 10 basis points.

One veteran salesman and friend of the blog notes that there are no sellers and only buyers. He offers that volume is lighter than one would expect because the street is not carrying much paper and that has made some paper very pricey.

By way of example of the steaminess of the market he cited the McDonald's (MCD) 2018 bond which traded at T + 90 today. One month ago the bond was at 150 and two months ago around 20.

There is a 2035 Walmart (WMT) which traded + 105 yesterday. That bond was T+ 200 a month ago.

The rally is relentless and marches on.

Comments

[SW Richmond:]

So how did everyone enjoy the Treasury market stick-save today?

What I'm reading is that the "investors" who had a "change of heart" were 50% foreign CB's.

www.treasurydirect.gov...

Capital will be left no refuge by the global coordinated reinflation / currency devaluation.

Jun 11 05:13 PM

[Mono:]

SW-

agreed. i was wondering if you mind posting a link to the site without pdf direct as i would like to monitor in perpetuity and revisit old auctions.

much appreciated

Jun 11 05:25 PM

[RiskReturnO...:]

Watch for 4.0% on 10-year to act as near term resitance, then it could become long-term support ... perhaps best trade is to lighten up on TBT until the next auctions for long term treausires ... add to position on any pull back and watch breakout above 4% yield to ride the next wave up on TBT.

Jun 11 05:26 PM

[JasonMichael:]

Remember: Sell America

Jun 11 05:30 PM

[popey:]

Wow what a great investment 4.69 on the 30 year, when the USD is about to lose 10 % in the next 12 months. What a farcical stick save.

Jun 11 06:18 PM

[whidbey:]

The monetizing proceeds apace some times in strange ways.

The sale to the CBs was likely an indirect sale to the Fed who needed to buy down the curve before the next wave of mortgage problems. (that is the alt A wave down). Cast no shadows, stir no dust but embellish the curve you must! And, 4% is tempting given the alternatives out there but it is not a longer run trade - yet.

Jun 11 06:35 PM

[Night_Rider:]

What a let down! Where's the beef?

I'm beginning to believe that the whole market is one big ponzi scheme.

Jun 11 06:47 PM

[grey road:]

Obviously this wasn't reflective of what is happening. I would not be suprised if the Chinese did not buy any of these today. My guess is that they were bought by the fed through someone else. I am more convinced than ever that treasuries will go lower for quite some time.

Jun 11 07:31 PM

[Perry B:]

thanks for the info on blattistics.com

Jun 12 10:26 AM

[Perry B:]

Robert 14793 I just checked out Blattistics looks like stock peddlers for pay how has it increased your percentage in trading

Jun 12 10:30 AM

[billp37:]

What's left of now-defunct Eclipse Aviation [Albuquerque, NM]amounts to a paltry sum compared to the more than $1 billion in debt reported by the company when it entered U.S. Bankruptcy Court last November.

All the tools, equipment, computers, office supplies and furniture - even three old pickup trucks - add up to $63.l million, according to a list of assets submitted by the company to bankruptcy court earlier this year.

Eclipse bond holders

· Kings Road Investments Ltd. of New York City, bond holder, $92.3 million
· HBK Master Fund of Dallas, bond holder, $84.9 million
· Citadel Horizons of Chicago, bond holder, $53.4 million
· UBS Securities of New York City, bond holder, $30 million
· Silver Oak Capital of New York City, bond holder, $26.1 million
· PAR Investment Partners of Boston, bond holder, $25.6 'million
· Citadel Investment Group of Chicago, bond holder, $25.2 million
· Morgan Stanley & Co. of New York City, bondholder, $24.1 million
· Tempo Master Fund of Greenwich, Conn., bond holder, $21.2 million
· Sandelman Partners MultiStrategy Master Fund of New York City, bond holder, $16.2 million
· Seneca Capital International of New York City, bond holder, $14.7 million
· DKR Capital Inc. of Stamford, Conn., bond holder, $11.2 million
· Investment Interlachen of Minneapolis, bond holder, $11.2 million
· Sandelman Partners of New York City, bond holder,. $8.4 million
· Seneca Capital L.P. of New York City, bond holder, $7.7 million

----- Forwarded Message -----
From: [e-mail]
To: "William Batie" <William.Batie@morg...
Sent: Friday, June 12, 2009 8:04:48 AM GMT -08:00 Tijuana / Baja California
Subject: eclipse bonds insurance

Hello Bill

Morgan Stanley apparently holds $24.1 million in bonds in bankrupt Eclipse Aviation we read in the Albuquerque Journal on Friday November 28, 2008.

1 Did Morgan Stanley insure the $24.1 million Eclipse bonds?
2 Which insurance company?
3 If insured, has the insurance company paid off or will pay off after, perhaps, a process?

Reason we ask the question is that we are in the process of filing a fraud loss complaint with NCUA.

regards
bill

Jun 12 11:28 AM