Bond Expert: Wednesday Wrap

Prices of Treasury coupon securities have surged following the FOMC announcement as participants took solace from the absence of explicit language signaling a pause and noted that there is a particularly long (2 months ) interergnum between meetings. So it will be a while before they have a chance to gather around the big mahogany table and reassess the issues. For the day the yield on the benchmark 2 year note has declined 9 basis points to 2.26 percent.

The yield on the benchmark 5 year note has slipped by 8 basis points to 3.03 percent. The yield on the 10 year note has declined by 7 basis points to 3.75 percent and the yield on the Long Bond is also lower by 7 basis points at 4.48 percent. The 2year/10 year spread rests at 149 basis points.

As I often do before market moving events I did record yields on benchmark Treasury securities 15 minutes before release of the FOMC statement and the steepening is even more pronounced. When measured from 200PM levels the 2year/ 10 year spread is 5 basis points wider and the 2 year/30 year spread has leaked wider by 7 basis points.

Similarly, the foreign exchange markets are unabashedly unhappy with the statement as the dollar has surrendered ground versus the Euro, sterling and the yen since 200PM.

The price action in equities is also troublesome. I do not know why they react in the manner which they do but the S and P Index has firmly rejected the 1405 level.

There has been a reasonable amount of activity since the announcement but traders and salespeople with thom I spoke attribute that more to month end activity rather any specific response to the statement. Spread product remains a favorite especially if you are firmly planted in the camp that a pause is imminent or if you buy the range bound philosophy I articulated earlier.

Mortgages are in line with swaps and a tad tighter to Treasuries. There was real money and hot money buying of 5s and 6s but the dealer reporting that specifically noted that much of that flow was the month end crowd.

Corporate bond spreads as measured by the IG10 had spent the day tightening and had reached the tightest point of the day just prior to the Fed announcement. They have retraced those earlier gains and are 5 basis wider from the tights at around 95 on the IG 10. That would have them closing unchanged on the day. The sell off in corporates coincided with and was in sympathy with the sharp declines from the highs suffered in the equity markets.And with the FOMC out of the way some anticipate a robust new issuance calendar tomorrow.

Agency spreads are closing the day a basis point or so tighter. Traders attribute that to the effect of month end index buying.