Bond Expert: Tuesday Wrap

by: John Jansen

Prices of Treasury coupons surged today as the euphoria which dominated the market yesterday slipped away and an enervating fear replaced it. The fear is most evident in the strength of the 2 year notes, which is within spitting distance of cycle lows. It can be felt in the serious reversal in the stock market which at this moment has retraced about 2/3 of the gains of yesterday. It can be felt in the retreat in credit product which has seen large chunks of the advance of yesterday eroded.There is a worrisome view developing today amongst market participants. There is a nascent concern that the commonweal , with the GSE rescue, has fired its biggest bullet, and that there is very little left for the government to do, save loading the members of the FOMC into helicopters with bags of money which they can sprinkle liberally about the countryside.

The Treasury acted boldly in finally confronting the problems at FNMA (FNM) and Freddie Mac (FRE). But there is a sense of hopelessness that the crisis has acquired its own internal self propulsion, an inertia, which keeps it rolling in spite of all attempts to restrain it. That motion, unchecked, seems destined to end in some deafening crack-up.

The yield on the benchmark 2 year note has declined 10 basis points to 2.20 percent. The yield on the 5 year note also dropped 10 basis points and it yields 2.88 percent. The yield on the benchmark 10 year note has tumbled 8basis points to 3.59 percent and the long Bond yield dropped 8 basis points, also, to 4.19 percent.

The 2 year/10 year spread has widened 2 basis points to 139 basis points. That spread widening indicates to me that fear is in vogue. If the price gains had been motivated by convexity fears, then the 2year/10 year would have flattened.

I wrote earlier about the shellacking of MBS paper. At that time MBS was 15 ticks wider to swaps. The sector has improved somewhat and is 10 ticks wider to swaps and 15 ticks wider to govies.

Agency spreads are wider by about 5 basis points in the 2 year sector, 6 basis points in the 5 year sector and 5 basis points in the 10 year sector.

A while ago I posted a separate piece on the corporate bond market and the IG 10 has widened another basis point since I wrote that and now stands146/147.

Swap spreads cratered, also. Spreads in the 2 year sector are wider by 6 basis points as are spreads in the 5 year sector. Ten year spreads are wider by 3 basis points.