Bond Expert: Tuesday Wrap

Includes: FNMA, SPTL, TIP
by: John Jansen

Prices of Treasury coupon securities posted a truly bifurcated result today with yields on the shorter maturity benchmark issues rising while longer-dated issued posted gains.

The yield on the 2 year note climbed 4 basis points to 1.08 percent. The yield on the 3 year note increased 5 basis points to 1.65 percent. The yield on the 5 year note increased one basis point to 2.60 percent. The yield on the 7 year note posted a 2 basis point decline to 3.28 percent. The yield on the 10 year note slipped 3 basis points to 3.69 percent. The Long Bond was the superstar of the list as its yield tumbled 6 basis points to 4.57 percent.

The 2 year/10 year spread narrowed 7 basis points to 261 basis points.

The 10 year/30 year spread compressed 3 basis points to 88 basis points.

The 2 year/5 year/30 year butterfly cheapened to 45 basis points.

The breakeven spread on 10 year TIPS narrowed 6 basis points to 186.

The 30 year breakeven spread is 232 basis points.

The Treasury conducted an auction of $42 billion two year notes today and the response, as viewed through the prism of auction results, was less than festive. There was a tail of 2 basis points. (In bond market jargon, the tail at an auction is the spread between the level at which the issue was trading in the market immediately prior to the bidding deadline and the level which ultimately cleared the market.)

One trader observed that this was the biggest tail on a two year note auction since last December. I will trust him on that front.

I do think that there is a market-related reason for the tail. I think that many investors did not wish to miss the auction and preferred not to be aggravated by the bidding process.

Consequently, there was significant buying of the WI issue yesterday and today in advance of the auction. I think that took the short base out of the market.

If there truly had been a debacle here and if dealers and investors had bought many more bonds than they needed, then the long end would not have traded as well as it did following the auction. If dealers were long they would have played defense by tattooing the 5 year note and 7 year note which are scheduled for tomorrow and Thursday.

Economic data that printed today was mixed. The Case-Shiller housing data indicates more stability in the housing market. On the other hand, the Conference Board confidence number declined for the second month in a row and showed a consumer deeply concerned about the state of the labor market.

San Francisco Fed President Yellen spoke today but did not break any new ground. She noted that the recovery would be slow, but when the time arrives to tighten, she said, the Fed would do the right thing and would not repeat the policy mistakes of the Arthur Burns and William Miller regimes.

I hope she is right. Actually, I hope that she is wrong as traffic to my blog is highly dependent on market volatility. A strong whiff of inflation wafting through the economic precincts would be good for traffic!!

Swaps, Vol and MBS

Swap spreads are mixed. Two year spreads are unchanged at 41. Three year spreads are 1/4 basis point tighter at 49 3/4. Five year spreads are 2 basis points tighter at 41 1/2. Seven year spreads are one basis point tighter at 23 3/4. Ten year spreads are 1/4 basis point tighter at 22 1/4. Thirty year spreads are 2 basis points wider at NEGATIVE 19.

The three month/ten year ATM swaption straddle is down to 611 basis points.

There was some chunky receiving in the belly of the curve early in the day as fast money clients reduced risk.

Mortgages are about 5 ticks tighter to swaps (using the FNMA 4 1/2s). The gains are slightly less as you march up in coupon with FNMA (FNM) 5s 3 better to swaps and FNMA 5 1/2s 2 ticks better to swaps.