Bond Expert: Friday Wrap

Prices of Treasury coupon securities were not quite dramatically unchanged, but a huge wave of ennui engulfed the market and trading activity today was quite minimal. It was a very volatile week in the various market segments and from the earliest moments of the day, participants favored inaction over action.

Action will pick up next week as the Treasury returns to market after a fortnight hiatus. I think that next week will be about underwriting concessions and shooting the taxpayers in the big toe. Dealers will accomplish that task by lending a merdurinous tone to the belly of the yield curve.

The 2 year/5 year/30 year spread is currently 49 basis points, which is where it closed yesterday and opened this morning. (That factoid in and of itself should tell you about the lack of activity.) The Treasury is auctioning $42 billion 2 year notes, $ 9 billion 5 year notes and $28 billion 7 year notes. The duration in the 5 year and 7 year buckets swamps the duration in the 2 year bucket.

There might be a hiccup to swallow the 2 year on Tuesday, but I think that will quickly reverse as traders face the 5 year and 7 year supply. I suggest buying the 2 year versus the 5 year and 7 year. If you do not want the steepening trade, play defense by adding the 30 year. I think that the 2 year/5 year/30 year butterfly will be 10 basis points to 20 basis points cheaper by the time the auction process runs its course.

The 2 year/10 year spread is 2 basis points wider at 266 basis points.

The 10 year/30 year spread is 89 basis points.

The yield on the 2 year note dipped a basis point to 1.00 percent. The yield on the 3 year note slipped 2 basis points to 1.56 percent. The yield on the 5 year note is unchanged at 2.53 percent and the yield on the 7 year note is stationary at 3.23 percent. The yield on the 10 year note edged higher by a basis point to 3.66 percent. The yield on the 30 year bond dropped a basis point to 4.55 percent.

Swaps and MBS

Swap spreads are tighter across the yield curve. Two year spreads are 1/4 basis point tighter at 44 1/2. Five year spreads are 2 basis points tighter at 45 1/2. Ten year spreads are 2 basis points tighter at 22 1/2. Thirty year spreads are 2 1/4 basis points tighter at NEGATIVE 20 3/4.

Fannie Mae (FNM) 5s are 3+/32s tighter to swaps.

Corporate bonds

The corporate bond market, in the words of one salesman, barely opened today. Paper is about 5 basis points tighter and there is still insatiable demand for quality paper.

The Bank America (BAC) 7 year which priced at 330 yesterday is 327/323.

The 5 year Boeing (BA) priced at 110 and is 103 bid.

The 10 year Boeing priced at 130 and is 125 bid.

Comments

[Gary A:]

I am thinking that if all these bonds are not swallowed, that the government through Goldman Sachs will scare the stockholders out of the market and into bonds to sop up the excess. At some point this could very well happen. I don't see the fed monetizing because they fear China. They may just want a little market correction that gets out of hand. hubpages.com/hub/Why-G...

Jul 24 07:54 PM

[whidbey:]

Selling debt during a deflation is easier than convincing the taxpayers that the spending is justified. The public is long run skeptical of current policy individuals will stop supporting the treasury sales and save the cash for personal uses.
Institutions are more likely to play the game, but only at increased interest rates. This means stagflation in the bond market, and eventually economy wide. We are still using bonds in institutional portfolios, but precious metals will replace bonds at some point in the future. The Sales can only increase at ever higher rates.

Jul 25 01:55 PM

[upgrayed:]

It's not a major feat to predict that the status quo won't hold forever, it never does.


On Jul 25 01:55 PM whidbey wrote:

> Selling debt during a deflation is easier than convincing the taxpayers
> that the spending is justified. The public is long run skeptical
> of current policy individuals will stop supporting the treasury sales
> and save the cash for personal uses.
> Institutions are more likely to play the game, but only at increased
> interest rates. This means stagflation in the bond market, and eventually
> economy wide. We are still using bonds in institutional portfolios,
> but precious metals will replace bonds at some point in the future.
> The Sales can only increase at ever higher rates.

Jul 25 09:55 PM