Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities have continued the recent resurgence which has seen them climb from the deepest recesses of financial hell to levels which approach a modicum of respectability.

There is not one salient reason to which I can point as a clear explanation of the price gains. The Federal Reserve certainly created some shorts on the street with its buyback. I would wager that some day trading types would have used that as a chance to be short on the offered side with the hope that after a healthy advance the market would retreat. Alas, we can quote the poet regarding the best laid plans of mice and men (they often go astray).

I think that the alacrity of the rally has fooled some in retail land. One had a very narrow window in which to buy 4 percent 10 year notes or 30 year bonds in the 4.80s. I think the price action has transformed some institutional shorts into day trading shorts as they hoped for a back-up that never came and were forced to cover.

The stock market has grown quite wobbly and is experiencing some disorientation. Perhaps maybe a bout of vertigo. I suspect that there is a pile of money exiting stocks for the safety of the Treasury market.

And the economic fundamentals remain bond friendly. PPI was better than expected and capacity utilization was at an all time low. Housing starts were better than expected but they should be after the peak to trough decline they suffered.

The yield on the 2 year note declined 3 basis points to 1.19 percent. The yield on the 3 year note slipped 4 basis points to 1.79 percent. The yield on the 5 year note fell 4 basis points to 2.68 percent. The yield on the 7 year note fell 5 basis points to 3.32 percent. The yield on the 10 year note dropped 5 basis points and rests at 3.66 percent. The Long Bond was the star of the day as its yield fell 7 basis points to 4.49 percent.

The 2 year/10 year yield narrowed 2 basis points to 247 basis points.

The 2 year/5 year/30 year butterfly is 32 basis points.

Corporates and Agencies

Corporate bonds are once again violently unchanged and the tone remains firm. One veteran salesman used the saga of some issuance by Valspar (VAL) (specialty chemicals, I am told), a BBB issuer. The firm offered $300 million 10 year notes today. The initial talk was + 375 which was 3 5/8 by pricing time. Sources report that there was better than $1 billion of orders for this issue.

I have also heard of some scattered selling of names which have performed superbly over the last month or so. There were sellers of 10 year Walmart (WMT) paper (95 bid) which has tightened 120 basis points in the last six weeks.

McDonald's (MCD) (hamburger) 10 year paper trades around 100 and there were sellers of that. The size was small, but one source opined that the money was probably heading someplace yieldy such as the Valspar deal.

Agency spreads are about 2 basis points wider across the curve. Freddie Mac (FRE) will price a benchmark size 5 year note tomorrow. The talk is T+40.

Swaps, Mortgages and Vol

Real money was paying in swaps today as the market rallied. Speculators and mortgage folks were busy receiving.

Two year swap spreads widened 2 1/4 basis points to 42 1/2. Five year spreads narrowed 3/4 basis point to 40 3/4. Ten year spreads narrowed 1 3/4 basis points to 22 1/4. Thirty year spreads are one basis point wider at NEGATIVE 25 1/4.

Mortgages are 2 ticks tighter to swaps. The level of activity was light but the Federal Reserve and a host of money managers were better buyers.

The three month /10 year ATM straddle was 638 mid today.

Comments

[Macro_Man:]

I have commented regularly in your excellent update over the past few days. I have been long TLT and have been making a case for a rally in long bonds.

Many reasons: Treasuries were way oversold, sentiment was extreme; only 1 out of a 1000 liked Treasures, heavily shorted with negative repo rates. Unwind of reflation/inflation trade, flat to negative inflation numbers, stock market weakness, US govt and Fed talking about fiscal and monetary responsibility, pricing in of apparently no more additional QE in Fed meeting next week, $ strength, Elliott Wave analysis...bounce back due into the 4.5% - 4.25% range, buying by US households, some semblance of sanity coming back to market, BRICs no longer throwing stones at their own glass houses. Swine flu?

Double top in long bond with an oversold spike day. Anyhoo, I think the rally continues for a little more time. I was heavily long TLT, TLT calls, TBT puts. Been booking profits into the rally...a little too early. Sentiment has been so negative, that it affected me as well. Still have some long exposure.

Jun 16 07:56 PM

[LKofScotland:]

Bear market rallies are ALWAYS ferocious. Market timing is bad enough. Trying to time interest rate moves is totally INSANE especially when there is no reason for governments NOT to print money until its all worth less than the paper its printed on and they go so far as to say that THAT IS THEIR POLICY. On the other hand--be my guest and buy that 30 year at 2%. I love this disaster of a war in Afghanistan and the thought of you putting good money after one failed policy after another (now it will be healthcare)--well, I guess the best I can say is, "rah, rah, shish-koom-ba."

Jun 17 11:03 PM