Prices of Treasury coupon securities took an ugly turn today as a less than enthusiastic bidding resulted in a sloppy 30 year bond auction.
Trading was less than professional as in the hours prior to the auction the WI bond passed most of the day below 4 percent. And as I chronicled along the way, the bond was for a time the best performer on the list.
That is not the way to underwrite Long Bonds and the issue is now the laggard of the day. I have always maintained that the object of the game is to shoot the taxpayer in the big toe. In this instance the dealers shot themselves rather than the taxpayer.
What happened to turn the result so ugly? I think I had the right idea when I wrote just prior to the auction (but failed to have the courage of my conviction by risking capital) when I noted that professional shorts had probably covered already as the price action was painful.
In addition, the 30 year sector is the least played by the foreign central bank community so any intervention money which required a home was not waltzing into the 30 year bond.
So dealers bid and when the result is announced they discover that the underwriting bid which they submitted was hit and they now own more bonds than they had expected.
The next iteration of the process is to sell what you own or to create a hedge by selling something else. In this case it appears that the unhappy holders did a little of each.
One other factor is the three day weekend. I am told that it will be a full day of trading tomorrow and there will not be an early close. But I do think that trading will be light and thin and so some speculators who might normally be patient with a position are quicker to kick the position out.
I would be remiss if I did not mention the speech that Chairman Bernanke will deliver later this evening on the topic of the Federal Reserve balance sheet. That could also move the market and would be another reason for traders to quickly shed positions.
I think that there has probably been some acceleration of the normal Friday rate locking phenomenon as some of those players choose to do that in an environment with a bit more liquidity.
Ergo, one very ugly round of trading after the auctions and positions deep enough below the surface as to require the aid and assistance of one Jacques Cousteau and his bathysphere.
The level of activity has been muted but I have heard of some real account nibbling in the belly of the curve on the spillage since the auction.
The yield on the 2 year note climbed 3 basis points to 0.89 percent. The yield on the 3 year note has edged higher by 4 basis points to 1.41 percent. The yield on the 5 year note increased 5 basis points to 2.22 percent. The yield on the 7 year note increased 6 basis points to 2.84 percent. The yield on the 10 year note also climbed 6 basis points to 3.25 percent. The yield on the woeful bond surged 9 basis points to 4.09 percent.
The 2 year/10 year spread is 236 basis points. I did not clock this (and maybe someone can fill in the blank) but I believe that probably would have traded at 230 or tighter sometime today.
The 10 year/30 year spread is 84 basis points. That is 3 basis points wider today.
The 2 year/5 year/30 year spread traded as narrow as 49 basis points. With the long end debacle the spread has returned to 54 basis points.
Swap spreads are mixed. The 2 year spread is unchanged at 35. The 5 year spread is 2 basis points tighter at 35,also. Ten year spreads are 2 basis points tighter at 16. Thirty year spreads are 2 basis points narrower at NEGATIVE 11.