Bond Expert: Wednesday Wrap

Prices of Treasury coupon securities surged today and recouped a portion of the outsized losses suffered yesterday. The yield on the benchmark 2 year note has dropped 15 basis points to 1.81 percent. The yield on the benchmark 5 year note dropped 13 basis points to 2.85 percent. The yield on the 10 year note slipped 10 basis points to 3.73 percent. The yield on the Long Bond dropped 10 basis points to 4.20 percent.

The 2 year/10 year spread steepened 5 basis points to 192 basis points.

The 2year/5 year/30 year butterfly about which I spoke at length yesterday is at 31 basis points. Yesterday I related the underperformance of the 5 year to a slower pace of central bank purchases. A portfolio manager with whom I speak offered a different view today. He suggests that the belly of the Treasury curve is the hedging apparatus for the detritus which enters the market via the spread markets and he thinks that the hedging of that unwanted risk has weighed heavily on that sector.

Economic data released today were genuinely disturbing. I have posted the HSBC interpretation of the Purchasing managers survey. I will add my view that there was weakness in nearly every component. The decline in exports from 52 to 52 is worrisome because that sector has been such a tower of strength for the economy. Weakness in that sector will quickly translate into less than festive GDP data.

Car sales were also horrific at both Ford and General Motors. I am told that they appear to be posting a decline of about 8 percent from year ago levels.

We still have to wade through the Initial claims data and the monthly employment report on Friday. I suspect that each of those data points will highlight pronounced economic weakness.

The economic data is arrayed against an optimism wending its way through the markets which holds that the actions of governments here and in Europe will be sufficient to forestall an even grander debacle.

I think that these proposals will serve as bandaids. The weakness has a momentum, an inertia of its own, and I do not believe that efforts of governments will postpone financial pain and economic weakness.

Mortgages are 2 ½ ticks wider to swaps. They had been much wider before a drive-by shooting buyer lifted several dealers simultaneously out of chunky blocks of paper to the detriment of the bonus pools of said dealers.

In the swap market 2 year spreads are wider by 5 ½ basis points. Five year spreads are one basis point wider and ten year spreads are one basis point tighter.

There was quite a bit of position squaring and risk reduction in advance of the Senate deliberations on the bailout package. One derivative salesman reported servicers and hedge funds busying themselves in the swap market by unwinding steepeners such as 2year/10 year and 5year/20 year.

Comments

[JasonC:]

"decline in exports from 52 to 52"

sounds dire... lol

2008 Oct 01 05:09 PM

[whidbey:]

The "slow down" is here, but the bond market is still hypertensive until it is seen that the liquidity is at hand, then I hope rates fall because the demand for money is going down, and down. The export story will likely get worse if the dollar's relative strength holds up, and it might. If that be true we will see exports fall like a stone. Any recovery is a long ways off, I think the ice age comes.

2008 Oct 01 09:55 PM

[MarvinMBA:]

Even though I fell that the bailout will do nothing after looking at the latest revisions to the bill now on its way to the house, I'm convinced it will even be harmfull both near term and long term as everybody that will receive anything from this bailout will take their money and EXIT...next comes the DEPRESSION believe it or not...MKarvinMBA

2008 Oct 01 11:19 PM