Bond Expert: Wednesday Wrap

by: John Jansen

Prices of Treasury coupon securities took a shellacking this afternoon in the aftermath of the FOMC statement at the conclusion of its meeting. Conversations with market participants yield a theme of disappointment and angst over impending supply. As the greatest risk on the supply front is in the long end of the market, those securities suffered the worst battering.

The yield on the 2 year note increased a meager 2 basis points to 0.87 percent. The yield on the 3 year note increased 7 basis points to 1.21 percent. The yield on the 5 year note climbed 10 basis points to 1.67 percent. The yield on the 10 year note surged 12 basis points to 2.65 percent and the yield on the 30 year bond vaulted 17 basis to 3.41 percent.

The 2 year/ 10 year spread widened 10 basis points to 178 basis points.

The 2 year/5 year/30 year butterfly richened to 94 basis points.

What happened?

Participants report that many investors had anticipated that the FOMC would actually authorize the purchase of long dated Treasuries. The FOMC said that it was “prepared” to do so but it gave no indication regarding when such purchases might begin nor did the Commitee offer any guideposts as to when such purchases might begin.

One dealer reported that prior to the FOMC announcement (and yesterday) investors had busied themselves front running the anticipated Fed purchases. He noted, in particular, buyers in the 2020 sector of the curve. That paper has been very cheap for a very long time. The conventional wisdom held that if the Fed were to buy Treasuries this cheap paper would be instant fodder for the Fed.

Those trades reversed themselves with the realization that the Federal Reserve would not be involved in immediate purchases of Treasury paper and the street had not properly set up for the 5 year note auction tomorrow. That issue is very rich on the curve and if there is no concession on the curve then the dealer community will exact a price concession.

Ergo, the sharp sell off after the FOMC statement.

Corporate bonds: Generic corporate bonds are about 5 basis points tighter today as the sector responds to the good news of a possible bad bank construct which would isolate the weight problems currently populating financial firm balance sheets.

Financial company paper has responded accordingly and JPMorgan and B of A 10 year paper is narrower by about 15 basis points. Most financial names are 10 basis points to 15 basis points better.

The new issue pipeline was closed today but with the FOMC out of the way, participants expect a round of issuance tomorrow.

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