Bond Expert: Monday Wrap

Prices of treasury coupon securities surged today as the weekend rescue of FNMA (FNM) and Freddie Mac (FRE) did little to remove the residue of fear which clings to the financial markets. While the GSEs received the imprimatur of Treasury Secretary Hank Paulson, fear and anxiety swirled around several regional banks and their prospects.IndyMac (IMB) provided the impetus with its weekend closure by the FDIC and Nat Citi Cleveland (NCC) took a drubbing of its own. I mentioned the dramatic rise in the cost of protection on WAMU (WM) bonds via the CDS and that fear resonated in the price of the stock which fell precipitously.

So with fear permeating the markets, treasury debt became a sanctuary again. There was central bank buying in the 5 year sector and money managers buying in the 10 year sector. I also heard of pension fund extensions from the 5 year sector to the 10 year sector. Day traders were spanked as the conventional wisdom held that with the agency market now virtually guaranteed by the full faith and credit treasury blanket that treasury paper would sell off. It appears that all the day traders were lined up on one side of the boat short and many spent the day covering shorts. I doubt anyone will want a serious position ahead of the Bernanke testimony tomorrow.

The yield on the benchmark 2 year note plummeted 14 basis points to 2.46 percent. The yield on the 5 year note dropped 11 basis points to 3.17 percent. The yield on the 10 year note slipped 10 basis points to 3.86 percent and the yield on the Long Bond fell 9 basis points to 4.45 percent.

The 2year/ 10 year spread widened 4 basis points to 140 basis points.

The 2 year/5 year/30 year spread finished the day at 57 basis points.

Mortgages are closing 3 ticks to 4 ticks tighter to Treasuries.

Comments

[sbenard]

John, I confess that I have little understanding of what makes the bond markets tick. It would have seemed to me that with all the inflation, interest rates should have been rising like smoke in a forest fire.
I appreciate your insights here, and on your website. Good stuff!

[bearfund]

Dear ex-fellow Treasury shorts: I was on the other side of your covering trades today! Thanks so much for giving me a price I never thought I'd see again at which to extend my position even further. See you at 10%! Love and kisses, bearfund.

[Josh Stern]

Beyond the sanctuary aspect, the dollar is doing better than expected vs. the Euro because Trichet is humming a happy tune while he drives Europe over the cliff.