Bond Expert: Wednesday Wrap

Prices of treasury coupon securities registered bifurcated results today, with price gains in the front end and little change or outright losses elsewhere on the curve. The curve steepening that resulted stems from the supply and duration which shall strike the market next week. Supply trumps all other factors, and traders are now busy anticipating that fiscal onslaught. (Larry Kudlow, who I generally dislike and who was a shill for the Bush Administration, does have a great description when he refers to the profligacy of the current Administration as “fiscal nymphomania”.)

Some weakness in the entrails of the ISM report as well as the Yellen statement provided a fundamental backdrop for the trade.

I think there are two other stories which have influenced trading today. I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash, that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import. I believe that there is some buying of the front end to hedge uncertainty associated with that sad circumstance.

Separately, there was a story this morning about the IMF issuing bonds. That would be a negative for US bonds as issuance from that quarter would draw reserves from the US bond market at a time when they are sorely needed.

The yield on the 2 year note declined 7 basis points to 1.04 percent. The yield on the three year note tumbled 8 basis points to 1.54 percent. The yield on the 5 year note slipped 4 basis points to 2.51 percent. The yield on the seven year note is unchanged at 3.20 percent. The yield on the 10 year note edged higher by a basis point to 3.54 percent and the yield on the Long Bond increased by the same amount to 4.34 percent.

The 2 year/10 year spread widened 8 basis points to 250 basis points.

The 2 year/5year/30 year spread is at recent wides at 36 basis points.

The market awaits the labor report tomorrow. The consensus sees a decline in employment of 365K and a rise in the unemployment rate to 9.6 percent (from 9.4 percent currently).

Agency market

Agency spreads reversed the price action of yesterday when the long end buyback and index extension buying led to the outperformance of the long end.

Two year spreads were 2 basis points to 3 basis points tighter. Five year sector paper is unchanged and 10 year sector paper is unchanged to a basis point tighter.

Investor flows were minimal as participants await the monthly labor lottery tomorrow morning.

One trader also noted that the two year agency sector benefited from the salutary effect of comments by Ms Yellen that the funds rate could remain at zero for years.

Corporate bonds

One syndicate desk operative and long-time friend of the blog expects that the pace of issuance will diminish over the next several weeks. That will be a result of the blackout period surrounding earnings releases in July.

The same gentleman thought that the second half of July would bring heavy issuance. He thought the issuance would be plain vanilla investment grade and junk paper. He thought that there is a strong bid in each market.

I noted that the response to the Oracle (ORCL) deal had been less than festive. He replied that this holiday week with quarter end was a horrible backdrop for a deal of that size ($4.5 billion) and the deal was fully priced.

Comments

[Larry House:]

Thanks for the timely info, John. Not a lot of hoopla with bonds, but the action there is very important. Grade A corporates have moved so much higher in price (lower yield) that I don't find them attractive right now. There may be another buying opportunity ahead, however.

Jul 01 04:05 PM

[whidbey:]

I think House above is correct on corps. But summer is compressed.

I am shocked at the rush to market by IMF, it must be clear that the rush is driven by need and fear of currency problems globally. The US operations are in aid of a structural deficit and can only end with default or inflating the debt away. That tidal wave will make the IMF seem trivial. The IMF is just bucking for its share of the available funds. We will one day wonder how this happened.

Jul 01 04:53 PM

[DRIx:]

Calif has issued scrip before (relatively recently, I think), so muni traders are less phased by this.

Jul 02 02:19 AM