Bond Expert: Wednesday Wrap

Prices of Treasury coupon securities tumbled today as Hank Paulson and his subalterns began the real world process of distributing securities to end users. The Treasury sold $17 billion new 10 year notes today at a yield of 4.075 percent. That stop out level was fully 1 basis point through where one could have purchased that paper in the market prior to the auction.This paper was deemed to be cheap by customers and street alike. Foreign central banks bought 34 percent of the issue. The issue had traded as wide as 150 basis points prior to the auction but dealers began reeling in shorts prior to the bidding. Profits are scarce these days so anyone with large profits is quick to book them. By way of example there were probably 15 basis points in this trade for many dealers and in this environment letting those profits melt would reflect poorly on one career and reputation.

One trader offered a contrary opinion in that for those who make their living in the trenches day trading, the issue was not so cheap. There was a pop prior to the auction and since the auction stopped through the market that bit of irrationally exuberant bidding further diminished dealer profit margins. This particular trader though that today’s result would make it tough to have anything except a very sloppy auction tomorrow.

The same trader ventured in to nature of foreign demand for today’s auction. As I noted earlier the foreigners bought 34 percent of the issue. The fellow with whom I spoke felt that the jump in indirect bids from the low 20s to that level reflected some of the reduced demand for mortgage paper.

The yield on the benchmark 2 year note jumped 2 basis points today to 2.57 percent. The yield on the 5 year note climbed 3 basis points to 3.31 percent. The yield on the benchmark 10 year note moved higher by 3 basis points to 4.05 percent and the yield on the Long Bond is 5 basis points higher at 4.69 percent.

The 2year/10 year spread widened 1 basis point to 146 basis points.

The 2year/5 year/30 year butterfly spread closed the day at 62 basis points.

Tomorrow there will be some consequential economic data to digest. Weekly initial claims have been climbing and there should be some reversal of the 448K number from last week.

In addition markets will focus on rate decisions of the ECB and the Bank of England. The commentary, especially from the ECB, in light of recent economic weakness will be instructive.

Comments

[whidbey:]

Nothing unexpected, even if we can not like the pricing. But we have not seen the worst yet; so much more paper to hang. Maybe an equity plunge into the fall will tighten things up a little. I ride TBT to offset the damage these exercises cause my investments.

2008 Aug 06 04:22 PM