Bond Expert: Friday Wrap

Prices of Treasury coupon securities are registering modest gains today as they erase some of the steep losses of yesterday. There was stability in the mortgage market and a modicum of that in the swap market. There was some client buying of mortgages and the belly of the Treasury curve as well as central bank interest in the 2 year sector.

I think that professional traders dominated the price action. There are certainly a few reasons extant for professionals to reel in shorts in advance of the weekend.

There is a geopolitical component to the bond equation at this time. There is turmoil in Iran and I doubt anyone can intelligently speculate regarding the market outcome if the theocracy in Iran is torn asunder.

Likewise, the nuclear parvenus in North Korea have defied UN resolutions and are supposedly contemplating lobbing a missile in the general direction of our 50th state over the July 4th holiday. I mean no disrespect but the fellow who rules that country is living in some alternate reality and one can not even attempt to guess what impact he might have on the markets.

Finally, the bureaucrats at Moody’s have chosen to place the State of California on watch for a possible downgrade. That would tend to make shorts more apt to cover.

So on a thinly traded summer Friday there are quite a few reasons to reduce risk in front of the weekend.

The FOMC meets next week to plot the near term course of monetary policy. I have read some missives which suggest that they will tinker with the QE program. One writer opined that they will take the existing programs and combine them into one big aggregate pile with the same total but the Desk would have discretion to concentrate its purchases more tightly than before.

I think any experimentation with the program is dangerous. One could say that QE is a failure. On the day that it was announced in March, the 10 year was trading in the 2.90s and closed that day in the 2.40s. Since they began the program the rate on the 10 year note has increased about 140 basis points from its lows.

I believe that they run the risk of spooking the interest rate market as well as the FX market if they try to fine tune that dubious program

However,I do think they will reiterate their devotion to keeping rates at zero for an “extended period”. They will note the green shoots but will note the very tenuous state of the recovery and the need to foster growth via low rates.

The yield on the 2 year note dropped 4 basis points today to 1.21 percent. The yield on the 3 year note edged lower by 4 basis points to 1.83 percent. The yield on the 5 year note slipped 4 basis points to 2.80 percent. The yield on the 7 year note declined 6 basis points to 3.44 percent. The yield on the 10 year note decreased 4 basis points to 3.79 percent and the yield on the Long Bond fell 6 basis points to 4.54 percent.

The 2 year/10 year spread is 258 basis points.

The 2 year/5 year/30 year spread posted marginal improvement at 15 basis points.

Have a great weekend!

MBS, Vol and Swaps

(3:00PM ET) Swap spreads are mixed today and the level of customer activity is subdued. One derivative salesman and longstanding friend of the blog cited some modest convexity related receiving.

Two year spreads are narrower by 2 basis points at 48 1/2. Five year spreads are 1 1/4 basis points narrower at 44 1/4. Ten year spreads are unchanged at 27 1/4. Thirty year spreads are 4 1/4 basis points wider at NEGATIVE 13 1/4.

FNMA (FNM) 5s are 2 ticks tighter to swaps.

The three month/10 year ATM straddle is 687 1/4 basis points.

Corporate Bonds

(2:30PM ET) Corporate Bond spreads are unchanged in very quiet trading.

There was one new issue from an oil and gas partnership with the somewhat flamboyant name of Magellan Midstream Partners (MGG). The entity sold $300 million 10 year notes at a spread of T+ 280. The initial talk was in the 300s and it trades currently 265 bid.

The corporate market vigil for supply has taken on a Waiting for Godot quality. One participant thought that if there is to be a spate of issuance it would occur early next week.

If it does not happen at that time, quarter end and earning season will intervene and any significant issuance would wait until mid July.

Comments

[whidbey:]

Your reviews referring to the drivers (events) of the market/political setting are very valuable and I very much appreciate you willingness to tie-in the events.

Great review and thank you.

Jun 19 06:51 PM

[John Jansen:]

whidbey,

Thank you.

JJJ

Jun 19 10:03 PM

[nobby73:]

I agree there are major geopolitical uncertainties, such as Iran, N Korea and Californian, but I don't see how the first two can have much economic effect. I suspect the bond rally on Friday was mainly people unwinding shorts ahead of FOMC meeting this week (and you know whatever the announce will be designed to support the Treasury market with $100bn issuances next week.)

California is a fascinating mess and the outcome there will likely provide guidance for how the US as a whole handles the coming crisis. What we have is a government budget out of control with collapsing tax revenues and steeply rising costs, just like the wider nation. I realize that a California downgrade will likely see Treasuries rise, but it seems counterintuitive to me. It's like jumping from the lifeboat back onto the Titanic because it's the bigger boat.

Jun 20 06:58 AM

[Old Trader:]

nobby,

If the SHTF in Iran, you don't think that's going to have an effect on oil, and by extension, the global economy? Regarding N. Korea, that's a bit more of a wild card, but turmoil in Asia won't be good, keeping in mind that the evident resurgence in China's growth, via its stimulus plan is behind a large part of the surge in the EMs.


On Jun 20 06:58 AM nobby73 wrote:

> I agree there are major geopolitical uncertainties, such as Iran,
> N Korea and Californian, but I don't see how the first two can have
> much economic effect. I suspect the bond rally on Friday was mainly
> people unwinding shorts ahead of FOMC meeting this week (and you
> know whatever the announce will be designed to support the Treasury
> market with $100bn issuances next week.)
>
> California is a fascinating mess and the outcome there will likely
> provide guidance for how the US as a whole handles the coming crisis.
> What we have is a government budget out of control with collapsing
> tax revenues and steeply rising costs, just like the wider nation.
> I realize that a California downgrade will likely see Treasuries
> rise, but it seems counterintuitive to me. It's like jumping from
> the lifeboat back onto the Titanic because it's the bigger boat.

Jun 20 11:09 AM

[popey:]

So the implosion of California is good for treasuries? Let me suggest the opposite.

Jun 20 01:03 PM

[Econ Base:]

"............However,I do think they will reiterate their devotion to keeping rates at zero for an “extended period”. "

Agree. The real reason is that the US consumer is now trying to save. Therefore there will be no economic growth for a while.

Read: portfolioforlife.blogs...

Jun 21 01:26 PM