Bond Expert: Friday Wrap

Prices of Treasury coupon securities have nudged themselves infinitesimally higher in a day significant by lack of activity. For a day on which the much anticipated labor data printed, the result was an anticlimax.Yields are the slightest bit lower. The benchmark 2 year note yields 2.51 percent. The 5 year note yields 3.23 percent. The benchmark 10 year issue yields 3.95 percent and the Long Bond yields 4.57 percent.

The 2 year/10 year spread is 144 basis points. I believe that spread will widen markedly into the supply next week. It is puzzlesome that it did not leak wider today, but I suspect that there might be some traders who see no reason to establish a significant position until the FOMC has released its decision on Tuesday. (The auctions are Wednesday for the 10 year and Thursday for the 30 year.)

There was virtually no trading in corporate bonds and spreads are finishing unchanged.

The last conversation that I had about MBS showed that paper unchanged, too.

Swap spreads were 1 basis point to 2 basis points wider.

Agency spreads were where the action was today. Spreads widened by 4 basis points to 6 basis points in very light trading. The only reason which anyone would offer is that the Home Loan sold $3billion 5 years yesterday, and euphemistically speaking it was a pig. It priced T+82 and never saw the light of day. The issue is available at the moment at +89. The conventional wisdom is that the thinness of the market and the stench from that issue dragged the market lower.

Have a great weekend.

Comments

[Larry House:]

Thanks, John. I wish you would share your view on the attractiveness (or not) of A-rated and higher corporate bonds. What do you think about HY bonds at this time? Where do you think interest rates will be a year from now? I would be glad to hear your views.

2008 Aug 01 04:52 PM

[JasonC:]

I'm not John, but I think the mid range investment grade corporates are an epic screaming buy at this point. I still wouldn't touch the junk though. Not really any need. You can find A rated paper at 10 years yielding up to 8% - and preferreds in the slandered sectors (finance, real estate e.g) are yielding 8-10%. Stay away from the autos (default threatens) and outliers with default risk like Washington Mutual. At some point a bank or two are going to figure out that no, you really can't lose money lending to As at 5% spreads. 3 years from now all the current fear will be a distant memory and spreads will be normal. Solid corporates will have returned double digits, easy.

2008 Aug 01 07:54 PM

[dogsofmyhead:]

Hi Jason,

Thanks for the good reply, I happen to have exposure to WaMu but I bought early and am having a difficult time figuring out why the yield is so high for the particular bond I purchased. In particular I have 25% of my portfolio allocated to: 939322AL7 with a maturity in 6m. I'm comfortable with WaMu not defaulting in 6m, but I'm not going to roll it over into another WaMu issue, do you have any recommendations for 1 yr out, or do I need to bail on my current WaMu holding???

Thanks in advance, you can see the rest of the portfolio on covester.com if interested.

2008 Aug 02 01:12 PM

[BigBillTolbert:]

Are you still holding them? They are due next week and I would be interested to know if they pay them out given their current situation.

On Aug 02 01:12 PM dogsofmyhead wrote:

> Hi Jason,
>
> Thanks for the good reply, I happen to have exposure to WaMu but
> I bought early and am having a difficult time figuring out why the
> yield is so high for the particular bond I purchased. In particular
> I have 25% of my portfolio allocated to: 939322AL7 with a maturity
> in 6m. I'm comfortable with WaMu not defaulting in 6m, but I'm not
> going to roll it over into another WaMu issue, do you have any recommendations
> for 1 yr out, or do I need to bail on my current WaMu holding???
>
>
> Thanks in advance, you can see the rest of the portfolio on covester.com
> if interested.

Jan 06 11:49 AM