Bond Expert: Thursday Wrap

| About: Altria Group, (MO)

Prices of Treasury coupon securities posted mixed results today with a firm bid in the shorter securities and a dearth of bids in the longer maturities. The yield on benchmark 2 year note declined 6 basis points to 1.28 percent. (I believe the low yield in this cycle was 1.25 percent, and that was attained in the aftermath of the Lehman bankruptcy when money funds were seen wreaking systemic damage.)

I will begin to include the three year note in my coverage as it has rejoined the fold. It trades at 1.80 percent. That puts it about 52 basis points over the 2 year note. It closed yesterday at 47 over. The yield on the 5 year note edged lower by 5 basis points and is closing at 2.46 percent. The yield on the 10 year note dropped a basis point to 3.69 percent. The 30 year bond bucked the trend and rose 2 basis points to close at 4.30 percent. The 2 year/10 year spread widened 5 basis points to 241 basis points.

The 2 year/5 year/30 year butterfly moved a basis point in favor of the 5 year note and rests at 56 basis points.

The theme for the day was curve steepening. There are several reasons for that shift in the curve. Supply is obvious as the street sets up for the spate of auctions next week. That movement is most obvious today in the 3 year note. It cheapened by 5 basis points to the 2 year note, while its longer 5 year cousin only weakened a basis point as dealers practiced price discovery ahead of the auction.

Stocks have dropped nearly 1000 Dow points since the inexplicable rally Tuesday. They dropped today in the face of some aggressive actions by overseas central banks which should have provided a Linus blanket worth of protection. Against that background the 2 year note becomes something of a refuge as it is a better place to park than the bills.

Central bank ease encourages the talk of more ease and that will delay an exodus for the long end.

Finally, economic data is uniformly weak and fosters talk of Fed ease and attendant curve steepening.

MBS, Swaps, Agencies

Mortgages are closing about 4 ticks wider to swaps.For the most part, swaps lagged benchmark Treasury debt today. Two year spreads widened by 3 basis points to 107 ½ basis points. Five year sector spreads also widened 3 basis points to finish at 102 ¾ basis points. Ten year spreads widened 2 basis points to 42 ½ basis points. Thirty year sector spreads are unchanged at NEGATIVE ¾ basis points.

Agency spreads were wider by 2 basis points across the curve. There was not much selling from clients and one trader suggested that the impulse was agency traders who covered in Treasury hedges which were likely to result in weekend fails.

There is a torrid pace of buying in the 0 to 18 month sector. Asian selling stopped about two weeks ago and those investors have reemerged as buyers. Domestic money funds have also been big takers in that sector.

Corporate Bonds

Corporate bonds as measured by IG 11 are about 6 basis points cheaper on the day. The last quote I observed on the IG 11 was 192/194. It has been a rather quiet day and there was virtually no new issuance. Participants are observing the renewal of carnage in the equity market and await guidance from the labor data tomorrow.

I failed to cover the corporate market late yesterday and missed the Altria mega deal. Altria (NYSE:MO) is the manufacturer of the Marlboro cigarettes which puts them in the strange position of selling something which subsequently shortens the life and kills its very own best customers. They have got themselves a major quandary there as that is a unique business model.

Notwithstanding that situation, the company issued $6 billion of bonds yesterday. The company offered $1.4 billion 5 year notes, $3.1 billion 10 year notes and 1.5 billion 330 year bonds. Each of the issues priced at T+600.

The offerings have improved somewhat in subsequent trading. The 30 year is 572 bid and the 5year and 10 year are 580 bid.

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