Bond Expert: Monday Wrap

Prices of Treasury coupon securities have spent most of the day mired in negative territory but have pared their losses as the day draws to a close. In fact, the steep declines in the stock market have caused the 2 year tone to turn positive on the day while the other benchmarks are registering modest losses.The yield on the benchmark 2 year note has declined by 3 basis points to 2.13 percent. In contrast, the yield on the 5 year note has edged higher by a basis point. The yield on the benchmark 10 year note has jumped 3 basis points to 3.84 percent and the yield on the Long Bond has climbed 2 basis points to 4.41 percent.

The spread differential between the 2 year note has jumped 6 to 170 basis points.

The 2year/5year/30 year butterfly has cheapened as that spread moved to 44 basis points from 52 basis points Friday.

The euphoria which permeated the marks on Friday evaporated over the weekend. There is now a host of concerns about the inflationary impact of the troubled asset rescue plan and the overall consequences of the reflation.

Other concerns developed as Democratic lawmakers constructed a counterproposal which called into question the comity which paraded itself before the nation on cable TV stations last Thursday at the conclusion of the Paulson/Bernanke sit down with the Congressional chieftains late that day. The Democratic proposal would give the Federal government a larger stake in the financial business as it would make the government an equity participant of any firm from which it buys damaged assets. It would also limit compensation of CEOs at aided companies. That will certainly hold down the number of firms which will opt in to this structure.

I chatted once again with a money market trader who notes that the mood in his market is disappointment and concern. Participants in that market are concerned that the partisan bickering will put the rescue plan at risk and that we could have a reprise of last Thursday when palpable fear held the money markets aloft in suspended animation.

Bank names, other financials and quasi financials as well as ASB issuers are tainted and have a difficult time trading for terms of more than a week or so. Certain pristine names in this sector enjoy an enormous advantage. Nestle, General Mills and Hewlett Packard are among the names which enjoy cheap financing.

One last thought on the money funds. Withdrawals were so large and so unprecedented last week that fear of a repeat of that situation has some of those players on the side lines.

The MBS market weakened today with FNMA 5s ½ point cheaper to swaps. FNMA 5 1/2s were 12 ticks wider to swaps. There was concentrated selling which resulted from credit issues related to the Lehman bankruptcy.

Swap spreads were 3 ½ basis points wider in the 2 year sector, 2 basis points wider in the 5 year sector and 1 ½ basis points in the 10 year sector.

Mortgage servicers bought short dated volatility and established curve flatteners as hedges.

Comments

[Alan von Al...:]

Speaking for many who hesitate to comment, I thank you very sincerely for these vital daily snapshots of the credit markets.

2008 Sep 22 08:56 PM

[PCScipio:]

Thanks, John, as always. Let me add, though, if "Participants in that market are concerned that the partisan bickering will put the rescues plan at risk," they can kiss my and all other taxpayers butts. If we must pay to save their markets, then we deserve our pound of flesh.

2008 Sep 23 12:13 AM