Bond Expert: Thursday Wrap

Five months until Christmas Eve!

Prices of Treasury coupon securities catapulted to significant price gains as a weak economy and credit fears gripped investors. The US market opened with a bid following the gains in Europe overnight which reflected the weakness in the Eurozone data. Economic data in the states fueled the gains. Initial claims data jumped above 400K again and Existing Home Sales posted a larger than expected decline. Ford posted a $9billion loss and that contributed to weakness in the equity markets.The yield on the benchmark 2 year note has dropped 15 basis points to 2.62 percent. The yield on the 5 year note has dropped 14 basis points to 3.35 percent. The yield on the 10 year note has declined 10 basis points to 4.01 percent and the yield on the Long Bond has tumbled 7 basis points to 4.61 percent.

The yield spread between the 2 year and the 10 year has widened 5 basis points to 139 basis points.

The 2year/5 year/30 year spread is 53 basis points. It closed yesterday at 42 basis points. That move is an excellent indicator of the directionality of that spread as in spite of the auction the spread has improved as the market rallies.

The Treasury did auction $21 billion 5 year notes at a yield of 3.44 percent. That completes this leg of Treasury supply.

The Treasury will announce the August refunding package next Wednesday. The hot rumor today has been that they will wheel out the 3 year note for an encore and announce that they will reinstate the issue in the pantheon of benchmarks at the November refunding.

(In the past the Treasury has also issued 4 year notes and 7 year notes. In the longer end they sold 15 year bonds and 20 year bonds.)

The dollar continues to trade well versus the Euro and the yen. Some participants have suggested that the incipient weakness in the European economies might usher in a period of dollar resurgence. If that were to occur it would take some pressure off the Fed and might alleviate the pressure from commodities.

WaMu Rumors

WAMU has been the subject of numerous rumors today regarding the status of derivative trades in the event of their downgrade.One rumor contends that in the event of a downgrade counterparties would hit them up for additional collateral.

Another rumor suggests that a downgrade would force a so called Termination Event in which the counterparties to their derivative transactions would close out those trades in the street.

Unless one has inside information regarding specifics of WAMUs ISDA agreements with various counterparties it is impossible to speculate on any outcome. One would also have to have clairvoyant powers and know the risk profile of WAMUs derivative book to know if such termination events would cause swap spreads to tighten or widen.

WAMU CDS closed yesterday at the 760/780 level which was the widest level of the day. I am not a maven of the mechanics of credit derivative trading but apparently they are so dire that they are trading on a points up front basis rather than spread.

The gentleman who fed me this quote said that the current points up front level would roughly equate to a spread of about 900. So it is over 100 wider on the day.

IG 10 is unchanged around 133 which is quite impressive given this story and the carnage in the stock market.

Comments

[whidbey:]

The reverse in the bonds today is linked to the equities decline, but it was also a flight to safety from the shadows cast by WM et al. But where does this end? Equities will crash in the fall, and bonds will rise, then spending will become irrational sending the fiat into a crash. I like your work but you never seem to get to ultimate implications. I think the end of rational markets is fast approaching. How is that for madness?

2008 Jul 24 05:58 PM