Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities sagged modestly today as the much ballyhooed month end / quarter end trade failed to materialize. There were several factors at work.

The market has rallied 50 basis points from the high yields attained in early June and that has probably induced some discretionary selling. Dealers are especially disposed to make sales as the Treasury will announce another round of supply on Thursday.

The recent round of auctions of last week went well, but until that round of auctions, which were quite orderly, being short supply has been quite profitable. I think that many traders sense an impending round of sloppiness because of the way the supply will hit the street.

The announcement will be late Thursday morning. I think that the unwashed will have begun their exodus for points east before that announcement and there will leave little opportunity to establish substantial shorts before the bidding begins next week.

There will be four auctions and little set up. It should be interesting.

Corporate rate locking pressured the market today and the Oracle transaction is the chief culprit in that department.

There is also supply in Europe this week, with the UK and Germany and France all set to issue. So the simple dynamic of no supply is passing and we are poised to enter a period of copious issuance by public and private entities.

The yield on the 2 year note edged higher by 2 basis points to 1.11 percent. The yield on the 3 year note is unchanged at 1.61 percent. The yield on the 5 year note climbed 2 basis points to 2.54 percent. The yield on the 7 year note increased 2 basis points to 3.18 percent. The yield on the 10 year note poked 3 basis points higher to 3.51 percent. The yield on the Long Bond yield edged higher by 2 basis points to 4.31 percent.

The 2 year/10 year spread is a basis point wider at 240 basis points.

Ten year TIPS are coming Monday, but that did not preclude a sharp rally today. The breakeven spread moved to 178 from 171.

Oracle (ORCL) priced $ 4.5 billion of bonds today. The company issued $1.5 billion 5 year notes at T+120 and $1.75 billion 10 year notes at T+ 155. The $1.25 billion 30 year bonds priced at T+ 185.

Agency Spreads

Agency spreads were mixed this final day of the second quarter. Ten year spreads were tighter by one basis point or two. That sector benefited from the long end buyback by the Federal Reserve. Five year spreads are just a basis point tighter and 2 year spreads are one basis point to 2 basis points wider.

In the long end buyback, the central bank procured about $1.2 billion of $2 billion offered. They purchased $225 million of a March 2021 issue. One analyst noted that they had previously owned none of that issue.

This particular observer believes that going forward, the Desk will tend to target issues which they do not own or of which they hold very little. His logic is that if they concentrate holdings, it will make the market less liquid.

Investor flows were light as participants lay low in front of the balance sheet date and a labor report Friday.

MBS, Swaps and Vol

Swap spreads are wider across the curve today. They have leaked a basis point wider since I posted on the topic earlier in the day. The conventional wisdom attributes the widening to the Oracle (ORCL) corporate deal which was expected to be in the $3 billion to $4 billion vicinity. Several participants report that the issuer rate-locked the deal and that transaction pressured spreads wider throughout the day.

The salient point to make here is that this is not a convexity trade. In that regard, sources report that mortgage servicers are currently close to balanced and that a 15 basis point to 20 basis point move would draw a balanced response in that receiving on a move to lower rates would equal the paying that would ensue if rates moved higher.

One salesman offered his opinion that if there was a move back towards 4 percent 10 year notes, that trade would deliver far more pain than a move to a 3 percent 10 year note.

The two year swap spread widened 3 basis points to 41 1/4. The three year spread widened 4 basis points to 52 1/4. Five year spreads widened 3 basis points to 41 1/2. Seven year spreads leaked 3 1/4 basis points tighter to 22. Ten year spreads widened 2 1/4 basis points to 24 and thirty year spreads normalized 2 1/4 basis points to NEGATIVE 14 1/4.

Mortgages are about 2 ticks better than swaps.

The three month ATM 10 year straddle is 677 basis points.

Comments

[Macro_Man:]

You are right as usual, we are indeed close to another sell off, but I think there are a few more bps on the long bond a little more time before that begins. We hit 4.27%, there is a good chance we have an intraday low of 4.09%-4.2% and then close higher than the previous days close. That would the signal to offload long Treasuries, or for those so inclined to short the long bonds.

Maybe this Friday...after the nonfarm payroll numbers?

Jun 30 06:07 PM

[Macro_Man:]

Meant Thursday

Jun 30 06:08 PM

[BigJake:]

Damn! Cetin changed his tune to a bear!

Jun 30 09:15 PM