Bond Expert: Thursday Wrap

Prices of Treasury coupon securities surged today as investors are gathering around the conclusion that the slowdown in the global economy has acquired a momentum which outpaces the ability of government to seriously impede it. The corollary is that even with a successful result in the House of Representative tomorrow the rescue package will have little impact on the economy in the near term. Yields plummeted today and the yield curve steepened today. The yield on the benchmark 2 year note tumbled 22 basis points to 1.60 percent. The yield on the benchmark 5 year security dropped 19 basis points to 2.66 percent. The yield on the 10 year note slumped 11 basis points to 3.63 percent and the yield on the Long bond fell 6 basis points to 4.16 percent.

The 2year/10 year spread continued to march wider and is now at 203 basis points.

The 2year/5 year/30 year butterfly richened today by 10 basis points, to 44 basis points. That means that the 5year/30 year spread widened a bunch more than did the 2year/5 year spread.

The Treasury market remains extremely illiquid. One trader told me that it is virtually impossible to trade any off the run with a maturity greater than 5 years. Another trader limited the carnage to the 7year through 20 year sector.

Here is an example of the illiquidity. One of the traders noted that an issue in 2016 cheapened by 4 basis points versus the 10 year note. Another issue with a 2015 maturity actually richened versus the 10 year note by 8 basis points.

In a former more normal time, those issues would almost always trade in tandem and the spread movements when measured against the 10 year note would be very discrete and very incremental. That two issues whose maturities are separated by only a year could see their relationship shift 12 basis points in one day would have been unthinkable 18 months ago. That suggests to me that the market is at the mercy of the last large retail trade.

Swap spreads blew out today. The 2 year swap spread widened by 10 basis points and the spread closed at 165 basis points. I think that is a record close and at the level exceeds the yield on the 2 year note which is 1.60 percent.

Five year spreads widened 8 basis points and 10 year spreads moved 10 basis points.

Separately, three month Libor is trading for tomorrow at about 4.40 percent. Three month Libor set today at 4.21 percent.