Bond Expert: Friday Wrap

Prices of Treasury coupon securities posted sharp losses today with the largest price declines occurring in the longer maturities. The yield on the 2 year note increased 2 basis points to 0.95 percent. The yield on the 3 year note climbed 34 basis points to 1.36 percent. The yield on the 5 year note jumped 6 basis points to 1.94 percent. The yield on the 10 year note vaulted 8 basis points to 2.99 percent and the yield on the 30 year bond increased 8 basis points also to 3.87 percent.

The 2 year/10 year spread is now solidly above 200 basis points at 204.

The 2 year/5 year/30 year butterfly is 95 basis points. It seems to be stuck in a range between 90 and 100.

There are some technicians with whom I speak who watch the 5 year/10 year spread. There is significant support at 106 and thus far we have failed to breach that level.

The Federal Reserve released the White Paper which divulged the methodology for the stress tests of the large banks. It does not indicate that we will quickly return to an environment dominated by fear and concerns about systemic collapse. It is unlikely that anyone will spend the weekend studying it and posit that the system is worse off than before.

I think the market traded on supply today and is not yet prepared to buy $101 billion of paper next week. It will move in fits and starts but unless there is a resurgence of retail buying the market will churn its way to higher yields next week.

Corporate bonds

The tone in the corporate bond market is as firm as it was when I posted earlier. Levels are about the same as they were earlier.

One salesman and friend of the blog noted that investors still favor quality names in safe sectors. In the industrial sector Caterpillar, Dupont and Goodrich have lagged. Spreads on that paper have narrowed 15 basis points to 20 basis points over the last 5 weeks while other paper has tightened significantly more.

Remember the huge Pfizer deal from a few months ago? The issuer sold a six year bond at a spread of 340 basis points. That bond traded today at 182. Some of that tightening is a recapture of the enormous concession but there is probably 70 basis points of legitimate spread narrowing there.

The 10 year tranche of the same Pfizer deal priced at T+ 350 and that bond trades around T+ 220.

Participants in the corporate bond market anticipate more spread tightening and would only change their view if forced to by some outside factor.

MBS and Swaps

Swap spreads are still mixed. Two year spreads are 1 3/4 basis points tighter at 60 3/4. Five year spreads are unchanged at 59. Ten year spreads are 3/4 basis points wider at 14 1/2 . Thirty year spreads are 1/4 basis point wider at NEGATIVE 37 3/4.

Mortgages have outperformed swaps by about 8/32. There is nothing funky happening within the coupon stack.

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