Bond Expert: Monday Wrap

Aug.11.08 | About: iShares TIPS (TIP)

Prices of treasury coupon securities plummeted today in light trading. Many people with whom I speak are on vacation and I think that is a universal theme. So trading is relatively thin and illiquid.I would also note that for the second consecutive Monday traffic at this website will be about 2/3 of its normal trading day average. I make that point because the traffic patterns reflect the volatility in the market. As an example the blog had its heaviest traffic day on the Monday following the announcement of the GSE rescue package. Volume today will be less than 50 percent of that very busy day. I only point it out because it seems to be representative of the activity level in the street.

Anyway, the yield on the benchmark 2 year note has jumped 7 basis points to 2.56 percent. The yield on the 5 year note climbed 7 basis points to 3.27 percent. The yield on the 10 year note jumped 8 basis points to 4.00 percent and the yield on the Long Bond vaulted 9 basis points to 4.62 percent.

The yield differential between the 2 year note and the 10 year note is a basis point wider at 144 basis points. The 2year/5year/30 year butterfly is 64 basis points. That is actually richer by 2 basis points which is unusual in a down market.

It is tough to get a real good grip on the factors which influenced trading today.

I will begin with the previously mentioned vacation discussion. With many top tier traders enjoying vacation, desks are thinly staffed by second team players. I think that creates a situation where an already illiquid and risk averse market becomes more so and more than normal the market is at the tender mercies of the last chunky transaction.

Some participants view the plunge in the price of oil as stimulative. It is akin to a tax cut for consumers and allows heavier spending on items other than necessities such as food and petroleum.

There is a heavy calendar of economic data globally this week and some traders are anxious to see the official data. I am not sure why that should be a big concern because those numbers are immediately old and superseded by the data on the ground which is rather sanguine.

Stocks have taken their cue from oil and have rallied most of the day. The lack of fear and loathing in equities has drained some of the bid from the Treasury market.

The plunge in the price of commodities has wreaked havoc and carnage on the TIPS market. In the 10 year sector the spread has narrowed to 220 points from a wide of about 260 basis points.