Bond Expert: Monday Wrap

Prices of Treasury coupon securities surged dramatically today in a truly historic day of trading. It was a day in which the populist impulse triumphed and the latent suspicion of Wall Street grounded in the middle class heartland rose up to defeat a bill crafted and formed by the ruling elite. (I do not necessarily subscribe to the theory but I think it is what domed the legislation. As I have written in this space before, $700 billion ain't an odd lot!!)

The markets were fragile from the start as credit fears erupted in Europe. The defeat of the rescue package magnified those fears and sent investors scurrying for the safety of the treasury market.

The yield on the 2 year note rotated through a mini interest rate cycle as its yield tumbled 37 basis points to 1.73 percent. The yield on the 5 year note dropped 32 basis points to 2.74 percent. The yield on the benchmark 10 year note fell 23 basis points to 3.62 percent. The yield on the 30 year bond dropped 21 basis points to 4.11 percent.

The 2 year/10 year spread widened 14 basis points to 189 basis points.

The Tips market reflects the collapse in commodity prices and suggests that we are about to usher in an era of deflation. While the yield on the benchmark 10 year note dropped 23 basis points the yield on the 10 year TIP slipped by only 6 basis points, placing that spread at 160 basis points.

I am not sure what to write. We sit on the edge of an historic and potentially destructive financial eruption. This surpasses the fear that I recall in October 1987 when stocks plunged. This is global in nature and chases down its prey ever more rapidly.

The markets have ignored every initiative by authorities to solve the problem and every attempt has failed to halt the deleveraging.I am not sure what sort of plan that the authorities can devise overnight to once more rescue the system. I think that you just stay liquid and pray that you have a seat when the music stops.

Agencies: Agency spreads widened quite a bit today. Spreads in the 2 year sector are 10 basis points to 12 basis points wider. Five year sector spreads have widened 5 basis points to 10 basis points as have spreads in the 10 year sector.

Illiquidity has triumphed and it is very difficult to move paper.

One trader noted that there was a glimmer of hope in the callable market as the rise in vol has cheapened some of that paper.

Comments

[MarvinMBA:]

In the long and short run the only thing that will save this market is to get M1 moving again and this means less tax and more jobs and lower prices for energy. The bailout is to help the losers on wall street and make main street losers. WE HAVE TO HELP MAIN STREET...BOTTOMS UP ECONOMY FOR A CHANGE INSTEAD OF HELPING THE TOP DOGS...THEY SCREWED THEMSELVES BECAUSE OF THEIR GREED.

2008 Sep 29 05:16 PM

[MarvinMBA:]

UNLESS THE BAILOUT MAKES MORE JOBS AND HELPS THE GUY ON THE STREET IT WILL BE MONEY RIGHT OUT OF THE POCKETS OF JOHN Q PUBLIC TO HELP THIS ADMINISTRATION BAIL OUT ITS POLITICAL DONORS. SHAME ON THIS ADMINISTRATION FOR SCREWING ITS OWN CONSTITUANTS.

2008 Sep 29 05:20 PM

[AlexS:]

I certainly agree with the less taxes part. But it looks like Pelosi is going to go home without extending the corporate tax cut or without keeping the AMT at bay for another year. Taxes up, markets down.

2008 Sep 29 05:56 PM

[MarvinMBA:]

Its important to save main street instead of wall street brokerage houses...the supply and demand for the toxic paper will eventually reach a equilibrium without a bailout....what the country needs now is to get M1 on the move upward and that requires a return to fundamentals...reduce taxes, lower energy prices, adequate jobs for whoever wants to work. This is the Main Street Bailout that will answer all questions going forward.

2008 Sep 29 06:05 PM

[TinyTim:]

It will be a lot more interesting to hear what the bankers and Senators say when the sky doesn't fall on Main St

2008 Sep 29 06:41 PM

[Topcat:]

Don't blame Pelosi for the AMT situation. A very good bill, which also covered renewable (solar, wind) etc credits was shot down by some Dems who insist on paying for it and Repubs who don't want to pay for it by eliminating the tax subsidies for big oil.

2008 Sep 29 07:04 PM

[whidbey:]

Yow and what people like Tiny above say when it becomes obvious that we are going into a credit crunch that kills employment slowly but surely. We may not like the results of this legislation, but we will like the results without the legislation.

2008 Sep 29 07:13 PM

[User 265729:]

TopCat,

I hate to say it, but in the realities of the cold, hard buying and selling that is the free market, you are a bit of a pussy.

2008 Sep 29 07:52 PM

[User 265729:]

whidbey,

NOBODY is telling us what it will look like WITH the legislation or WITHOUT the legislation. D If every man. woman and child in this county is going to be saddled with over $2,000 in debt over this thing, don't you think we have a RIGHT to have at least that much information?

This morning, on ABC, they tried to pin Dodd down on the chances that the bail-out would work. She kept giving him figure, 60, 70, 80, 90 percent. He REFUSED to respond directly to the question. I'M 100 PERCENT SURE THE TAXPAYERS WILL GET SCREWED MR. DODD.

2008 Sep 29 07:56 PM

[Steven Hansen:]

there should be no question that something needs to be done. but the consumer is 70% of the economy - and even as it was written when it failed, the bailout bill really did not pass on any help to the consumer. there should have been another $600 economic stimulus check in the package.

2008 Sep 29 08:36 PM

[closedbooks:]

When Barney Frank & Geo Bush get together to "save main street", hang on to your wallet and count your fingers.

2008 Sep 29 10:23 PM

[MiddleOfRoader:]

I guess most people cut school the day they taught economics, money and banking.

Perhaps micro-lending can be fostered here like in the Third World and if we're lucky and it takes we can maintain a subsistence economy.

2008 Sep 30 12:06 AM