Bond Expert: Friday Wrap

Prices of Treasury coupon securities took a roller coaster ride today as a very volatile week ended in very volatile fashion. The drama associated with passage into law of the gargantuan rescue package and the monthly labor data provided the backdrop for the price swings.The yield on the benchmark 2 year note has declined 3 basis points to 1.58 percent. The yield on the 5 year note dropped 2 basis points to 2.64 percent. The yield on the 10 year slipped 2 basis points to 3.61 percent and the yield on the 30 year bond fell 5 basis points to 4.10 percent.
The 2 year/10 year spread widened 1 basis point to 203 basis points.

The 5year note lagged versus the wings and the infamous butterfly spread (2year/5year/30 year) closed at 40 basis points today after finishing at 44 basis points yesterday.

The equity market had a wild ride of its own. At one point the stock jockeys had pumped steroids into the Dow and it was up nearly 300 points. The proximate cause of that rally was the passage of the bailout bill.

More sober souls, I assume, examined the data which was released this week and concluded that we are in recession and it is likely to be longer and deeper than many had previously anticipated. On that note equities collapsed late in the day and the S and P punctured the 1100 barrier on the way down to finish at 1099.23.

Swap spreads tightened by 18 basis points in the 2 year sector, about 8 basis points in the 5 year sector and 4 ½ basis points in the 10 year sector.
Mortgages lagged swaps by 2 basis points.

There is a dearth of high profile economic data next week. Late in the week we receive the trade balance data and that will give participants some information about how well foreign demand is holding up.

Tuesday is probably the most meaningful data day. The Fed will release the minutes of the last FOMC meeting and Bernanke speaks in Washington DC regarding the economy and the markets. That will certainly be germane to our business.

Agency market:

The short end of the agency market was “en fuego” today. Agency discount notes in the three month sector are about 100 basis points better over the last week. The three month bill trades around 50 basis points for the entire period while the yield on the agency disco has dropped from 2.65 to 1.60 today.Earlier in the week Home Loan paper in January traded at 3.35 percent. That sector screamed today and the same paper was trading in the 2.40s.

Separately, on Tuesday Home Loan issued some bullet paper with an April 2009 maturity and that priced with a 3.40 coupon. That same bond today would have priced with a 2.87 coupon.

Why the rally in short paper? Some of it is a testament to the success of the central banks and their massive injection of liquidity. Repo on agency collateral was 50 basis points today. That is a nice chunk of positive carry for the owner of the collateral.

Similarly, short rates are so low that it is forcing some investors out the curve as they find the pain of holding cash too much to bear.

There is also some talk in the market that Home Loan issuance has abated somewhat and that relieves some of the pressure on funding.

This story is interesting in conjunction with my earlier posting regarding some barely perceptible changes in the money markets. It is another outward sign that the logjam in the frozen money markets might just be at the early stages of resolution.

Comments

[granger:]

What are your thoughts. I have been following and old but reliable DJCORP (industrial and utility bonds) chart. It is screaming for higher rates, while governments continue to push and look for lower yields.

How would you interpret. Is thsi just another way of seeing fear and demand for cash/safety.

2008 Oct 05 08:55 AM

[verygreen:]

I have a question: if this article is true, will U.S. be a Tantanic to sink very soon?
"The $55 trillion question
The financial crisis has put a spotlight on the obscure world of credit default swaps - which trade in a vast, unregulated market that most people haven't heard of and even fewer understand. Will this be the next disaster?"
from:money.cnn.com/2008/09/...

2008 Oct 05 08:33 PM