Bond Expert: Monday Wrap

Prices of Treasury coupon securities tumbled sharply today and the yield curve steepened substantially in advance of significant supply from the US Treasury this week.

In addition to the fear of Treasury supply a thin patina of fear and uncertainty regarding the intentions of the mortgage crowd covers the market. As I noted in a prior post, there certainly was some servicer selling today and that contributed to the sell off. However, participants report that the selling was sporadic and modest in size. Some traders thought that much of the selling in the market which forced us to these higher yields was a result of active traders front-running the servicer trade.

One trader offered another interesting angle and suggested that the servicers do have a reasonable chunk to sell but many were holding off on those sales as they view the extant price action as a hiccup on the way to supply. The sanguine view of those folks is that once the Treasury completes its round of auctions the market will quickly reenter the 3.50 percent to 3.30 percent range.

The problem with that analysis is that it will be very, very messy on Friday if the 10 year is still sitting here or cheaper. The dealer community will be long the auctioned bonds as the servicers begin the hedging endeavor. Add a little rate lock selling into that brew and you can get to 3.75 percent rather quickly.

I hesitate to add this, but this week does mark the end of the Federal Reserve’s purchases of coupon securities. They have been the marginal buyer and without them on the bid life could become much more interesting (which is good for blog traffic).

The yield on the 2 year note has climbed 2 basis points to 1.02 percent. The yield on the 3 year note climbed 3 basis points to 1.60 percent. The yield on the 5 year note edged higher by 5 basis points to 2.49 percent. The yield on the 7 year note also increased 5 basis points to 3.16 percent. The yield on the 10 year note increased 6 basis points to 3.55 percent. The Long Bond increased by 6 basis points to 4.36 percent.

The 2 year/10 year spread is 4 basis points wider at 253 basis points.

The 10 year/30 year spread is unchanged at 81 basis points.

The 2 year/5year spread is a narrow 40 basis points.

Comments

[Tollsforthee:]

John-
Additional reasons to flee the long bond reside in Geithner's stated intent of rolling $600 billion from short-term to long-term maturities next year.

I wouldn't "hesitate" to mention the Fed's exiting the Treasury market. It's significant! That's been the artificial prop for this market for the past 6 months. $300 billion of demand ($50 billion monthly) just exited. Eventually, the Fed could even possibly bring those back to market, depressing prices further.

Good work, I look for your blogs twice daily.

Disclosure: Long TBT since October 6th.

Oct 26 06:10 PM

[popey:]

I suspect that the Fed will "extend" the treasury purchase program "indefinitely" to stick save this market. Bubble blowing has become a fine art lately, and Ben is a master, so the purchases should continue. Which will just make the inevitable collapse that much more spectacular in about 24 months.

Oct 27 03:49 AM