Bond Expert: Monday Wrap

Prices of Treasury coupon securities registered bifurcated results today as bonds with maturities of 5 year and less posted modest losses while bonds with maturities greater than 10 years posted marginal gains. The yield on the benchmark 2 year note gained 3 basis points to finish the day at 2.28 percent. The yield on the 5 year note has increased by 1 basis point to 2.97 percent. The yield on the benchmark 10 year note has slipped a basis point to 3.77 percent. The Long Bond yield has declined a basis point to 4.51 percent. The yield differential between the 2 year note and the 10 year note tightened by 4 basis points and rests at 149 basis points.

Dealers reported very light activity. Many European markets closed for a religious holiday and the lethargy from quarter continued as US trading began. Other participants chose to remain on the sidelines until they catch a glimpse of the Retail Sales report tomorrow.

There was a little bit of news to chew on. As I noted in an earlier post the Federal Reserve created some ripples in the water with its sale of $5 billion of coupons in the 2 ½ year region. Those sales sterilize the effect of some of the Fed’s innovative open market operations, which if left unsterilized would precipitate a monetary explosion. Some analysts believe that the Open Market Desk has a need to sell as many as $50 billion from its account to offset the effects of other operations. When the credit crisis began to unfold in earnest last August the System Open Market Account [SOMA] held $277 billion of Treasury bills. On May 8 2008 SOMA held just $65 billion bills.

It s my contention that some portfolio management philosophy will guide the managers at the desk and they will probably look to make future sales from holdings of coupon securities with longer maturities, rather than further reducing holdings in the short end.

I checked the current holding list which is available on line to see if the SOMA has concentrated holdings of any issues. Their largest holdings are in the old 10 year series in 2017 and 2018. They hold between $6 billion and $7 billion of the 4¾ August 2017, the 4 ¼ November 2017, and the 3 ½ February 2018.They hold $4.6 billion 8 November 2021 and $4.4 billion 4 ¼ August 2013. In the longest maturities they are the proud owners of $7.4 billion 5 May 2037 and $4.3 billion 4.375 February 2038.

I think that each of these securities is a prime candidate for sale as the Fed peels off its holdings of coupon securities.

MBS are 5 ticks weaker to 10 years and 2 ½ ticks wider to 5 years. Originators were chunks sellers, according to one source.