Armageddon? Maybe Next Week. 9 comments
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Prices of Treasury coupon securities retreated today as the financial Armageddon which some had awaited anxiously has been deferred for now. The rollicking trade of the last several days has yielded to something a little more placid and pacific. Against that background, yields on benchmark Treasury debt increased across the curve. The yield on the benchmark 2 year note has climbed 8 basis points to 2.33 percent. The yield on the 5 year note has climbed 6 basis points to 3.07 percent. The yield on the benchmark 10 year note has increased by 4 basis points to 3.84 percent and the yield on the Long Bond has climbed 3 basis points to 4.47 percent.
The 2year/10 year spread has narrowed 4 basis points to 151 basis points.
The 2year/5year/30 year butterfly has narrowed 1 basis point to 66 basis points from 67 basis points yesterday.
Other factors weighed on sentiment in the Treasury market. The market had approached levels yesterday which chart aficionados view as resistance. There was resistance on the 10 year note at 3.76 percent and the issue ran out of gas at 3.77 percent.
Similarly, the 2 year note traded at 2.25 percent. The funds rate is 2.00 percent and will be for awhile. Unless one starts to price in ease from the FOMC the 2 year note begins to look a little steamy.
Next week brings a tsunami of issuance from the Treasury. The Treasury will auction $28 billion 3 month bills and $27 billion 6 month bills on Monday. On Tuesday, the Treasury will look to raise $20billion via the year bill route. On Wednesday they will sell approximately $30 billion 2year notes and on Thursday they will offer about $20 billion 5 year notes.
I do not want to overstate the case because so much of this issuance is short dated paper for which central banks have shown strong appetite, but the total of that which I just listed is about $125 billion of supply.
That would tax the market in a normal times but as Labor Day approaches the market will turn thinner and thinner and the taxpayer will pay with a pound of flesh as the auction process unfolds.
In addition there is a bit of natural arbitrage here. Next week brings month end and a chunky extension of the Lehman Index. That extension necessitates that real money clients add duration to remain properly indexed. The easy trade for the Street is to buy 10 years and 30 years in anticipation of that demand and sell some of the supply against it.
One caveat. If Armageddon occurs next week this position will put you in the poorhouse and have you contemplating career change.
Swap spreads tightened by about one basis point across the curve.
Agency market
Agency debt is closing the session with a robust bid and some spread tightening versus Treasuries. Benchmark agency debt with maturities between 2years and 10 years are about 3 basis points to 4 basis points tighter to benchmark treasury paper.Why did spreads tighten today? I do not have a good answer to that one. Yields are a tad higher than yesterday and that might have attracted some inquiry. The imminent demise of FNMAA and Freddie Mac seems a bit exaggerated and that bit of equanimity probably attracted some buyers.
Other participants noted an undercurrent of belief that the Treasury would at some point cast its lot with the agencies and that would make the benchmark and other senior paper money good. That belief likely led to some buying. In addition, if one is a venturesome soul this would be an appropriate moment to sell a few Treasuries versus agencies as the Treasury will be regurgitating paper next week.
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This article has 9 comments:
It is just a symptom of the larger game which is afoot. The selling of debt in the US has nothing to do with the domestic markets; not the audience that matters. So we suffer. Why own Treasuries or Agencies? I am sure we are underestimating the risks and selling our lot too cheap especially when we know this is only the beginning of the sales that must follow. Woe is us.
yes. The bonds just add to the debt, which in turn brings the dollar down. I'm hedged with Gold and Energy. That said, good luck to all.
John - is the bond market giving you some indications for two weeks and beyond about the potential for deflation that you can comment on? Shorter term, if the bond auction is in fact well bid then we should conclude that deflation is upon us. Correct? Thanks in advance.