Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities surged today with the largest gains in the longer maturity issues.

The yield on the 2 year note declined 3 basis points to 1.10. The yield on the 3 year note declined 2 basis points to 1.72 percent. The yield on the 5 year note edged 3 basis points lower to 2.67 percent. The yield on the 7 year note fell 4 basis points to 3.30 percent. The yield on the 10 year note fell 5 basis points to 3.63 percent and the yield on the Long Bond dropped 8 basis points to 4.36 percent.

The yield on the Long Bond had touched 4.82 percent earlier in the month and has now rallied 46 basis points from that level. The curve has flattened by 9 basis points as in that same timeframe, the yield on the 10 year note has declined 37 basis points to 3.63 percent, from 4 percent at its high.

The 2 year/10 year spread is 253 basis points.

The 2 year/5 year/30 year spread is now 12 basis points. That is as cheap as it has been in the year I have followed it here.

One friend of the blog points out an interesting way to evaluate the cheapness at the current time of the 5 year note. He takes the yields on the 2 year note and the 10 year note and averages them (currently around 2.37). He then places that against the yield on the 5 year note and finds that the yield on the 5 year is 1.13 times the average of the 2s and 10s.

Using monthly closes back to 1980, the ratio has never been that high. In 2003 the ratio reached 1.08 and in late December 1992 it touched 1.07 percent.

So on a relative basis there is record yield in the 5 year sector.

The Treasury sold $40 billion 5 year notes today and the bidding interest from central banks was frantic. The indirect category of bidding (which the street holds is a proxy for central bank interest) took 68 percent of the total. That leaves about $13 billion for the rest of us.

That auction result assisted in maintaining a firm market tone.

The long end benefited from traders buying the back end against the supply tomorrow and Thursday in 5s and 7s.

I also think there is a perception shift at work here, too.

The World Bank began the shift yesterday with its forecast of a steeper contraction in the global economy this year. I also saw a report that the OECD issued a report which posited that the number of unemployed individuals would reach 57 million and 10 percent in the developed world in 2010.

And I think that some are now thinking that while we have averted a cataclysm (barely) that is not recovery and that the sprouting shoots do not contain the germ of a strong recovery.

So take a seat and wait for the ex cathedra pronouncement of the FOMC tomorrow.

MBS, Swaps and Vol

(3:45PM ET) Swap spreads are wider across the curve. Two year spreads are 1 1/4 basis points wider at 47. Three year spreads are 3/4 basis point wider at 51 1/2. Five year spreads are 1/2 basis point higher at 42 3/4. Seven year spreads are 1/4 basis point wider at 24 3/4. Ten year spreads are a basis point wider at 25 1/2. Thirty year spreads are 1 basis point wider at NEGATIVE 13 1/4.

Mortgages are 6 ticks wider to swaps. Traders report profit taking by banks in advance of quarter end weighing on sentiment.

The three-month 10 year ATM straddle is 673 basis points.

Corporate Bonds

(2:40PM ET) Corporate bond spreads are about a nickel wider today as the pause in the race to narrower spreads turned into a bit of a widening episode this day. One salesman noted that the left side (bid side) was being massaged today.

The market is thin as quarter end approaches. The quarter end date constrains dealer balance sheets and collides with the desire of some to take profits into quarter end after the enormous spread tightening this quarter.

One salesman noted the ATT (T) 5 1/2s of 2018, which are probably 15 basis points wider since Friday.

The Merck (MRK) deal is holding in and is unchanged to a tad tighter relative to the levels I posted this morning.

The new issue market was extremely quiet with only a couple of inconsequential names on the docket.

Coincident Indicators

Calculated Risk has published a very interesting post from the Philly Fed. It shows state by state economic activity levels and concludes that some 49 of the 50 states remain in recession.

Anyone who expects the Federal Reserve to even remotely hint at raising rates graduated magna cum laude from the Herbert Hoover School of Economics.

Comments

[Blackhawk:]

I graduated magna cum laude from the Herbert Hoover School of Economics, so I take great offense to that!!!

Jun 23 05:30 PM

[LKofScotland:]

These spreads are absolutely gargantuan. I'd hoped for a stronger response from BO relative to Iran because besides making America safer it prevents nuclear terror over the world's oil supplies which is clearly what has been driving up oil prices for the past many years and wreaking havoc with our markets and banks. It sure seems a lot cheaper than a bailout, too! I think it important to rember that all those "government ecnomists" backdated this recession so don't be suprised if they back date the recovery, too. The Word Bank complaining about growth? They've been giving their money to "the third world" since the 60's. They last thing Mr. Rothschild's bank wants to do is worry about the Western World anymore even if it was all he did in his time. Here's my view: the government will declare the recession ended this spring sometime this fall so that it can rationalize all of this inflation by proclaiming "growth." Kinda neat, isn't, that all economics is just a matter of (political) perspective? In the meantime your story over a "rethinking" of Quantitative Easing is VERY OMINIOUS. If it turns out "the experiment" was a TOTAL FAILURE Uncle Sam is on the hook for AT LEAST another 10-20 TRILLION just to bail-out "the mistake." Obviously transferring the lessons of the Japanese economy to America's IS TOTALLY INSANE. I think it was a long time ago that Japan went to war. I think I read in a book somewhere it was called World War something or other. I have heard the good old USA has been beating the war drums a little over the last 50 years. Something about Iraq, Afghanistan and Middle Eastern oil or something. I know I voted against all that war stuff, though, so that shouldn't be a problem anymore. Right? And, gee, that double-fat latte is kinda gotten expensive lately...

Jun 24 03:06 PM