Prices of Treasury securities are registering mixed changes in overnight trading. “Mixed changes” in this environment is somewhat puzzling and even a bit troublesome.
The U.S. market has always represented the ultimate safe haven venue, yet this morning according to my screen at about 700AM New York time, the yield on the 2 year note was actually several basis points higher than where it closed late yesterday. Indeed, the yield on every Treasury issue is higher than the level at which it finished in late trading yesterday.
Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble, as it exists at the whim and caprice of foreign investors who have, as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak.
I can only say that with financial markets in full retreat and full meltdown, it is thoroughly uncharacteristic for prices of Treasury coupon securities to be lower.
The yield on the 2 year note has climbed 4 basis points to 1.59 percent. The yield on the 5 year note has jumped 11 basis points to 2.77 percent. The yield on the 10 year note has climbed 5 basis points to 3.83 percent and the yield on the Long Bond has edged higher by just a single basis point to 4.12 percent.
The 2 year/10 year spread is 224 basis points.
The 5 year point on the curve has taken a drubbing since Tuesday. On Tuesday, I closed the 2 year/5 year/30 year butterfly at minus 56 basis points. At the current time it is minus 17 basis points. That means it has underperformed the wings by 39 basis points. One can blame the Treasury with its surprise reopening of $40 billion of securities for most of that movement.
I do not have much to add, since you can see for yourself the carnage all about us.
Update
In my opening comments this morning I launched into a diatribe which suggested that the preeminent position of the Treasury bond market was about to fade away.
I have spoken with friends and read some emails which I receive from the street, and that exercise leads to a different but plausible alternative hypothesis.
To distill their thoughts, it is about a giant systemic margin call, and the means to meet the margin call is via sales of liquid assets. So, the wreckage floating in the street results from those sales.
One correspondent noted that the serious damage in the mortgage market resulted from the same phenomenon and stemmed from margin calls at leveraged S and P funds that were forced to raise cash. This particular trader reported that some of those funds were mortgage sellers.
Another portfolio manager made an interesting point about the manner in which large portfolios have chosen to operate recently. He suggests that many funds have moved to private equity funds from public stock. He also notes that many had retreated from individual stocks and bonds for the glitz of hedge fund returns.
The problem there is that the new technique of management parks money in a place from which it is not extracted with ease, speed and dexterity. So the only stuff that is not nailed down and available for sale is Treasury and mortgage paper.
I still think that if we are bursting bubbles, the Treasury bubble is the ultimate bubble. But certainly this other interpretation is a plausible explanation for some of the recent price action.
