Bond Expert Wednesday Wrap: Wild Ride

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Includes: BIV, C, SPTL, TIP
by: John Jansen

Prices of Treasury coupon securities experienced another wild and volatile day today and are closing with sharp losses in the long end of the yield curve.

The market opened quite weak and successfully defended the 3.75 percent level on the 10 year note and a weak report on the services sector spurred buyers. The 10 year note rallied into the 3.60s.

That rally was concurrent with the refunding announcement by the Treasury. The tapped out Treasury will sell $75 billion of securities and raise $14 billion in new cash.

The offerings weighed on the market and the market broke down in the afternoon as bidders contemplated the orgy of duration on which the market will be forced to bid next week.

The yield on the 2 year note has increased by a solitary basis point to 1.21 percent. The yield on the 3 year note has increased 3 basis points to 1.75 percent. The yield on the 5 year note has climbed 3 basis points to 2.73 percent. The yield on the 7 year note jumped 6 basis points to 3.40 percent. The yield on the 10 year note increased 7 basis points to 3.76 percent and the yield on the Long Bond soared 9 basis points to 4.56 percent.

In dollar price, the 2 year note is down just $312.5 per million. The 30 year bond has shed over $15,000 per million bonds. The 2 year/10 year spread has widened 7 basis points to 255 basis points. I believe that there was some technical point at 252 basis points and the breaching of that level probably bodes ill for that spread.

The 10 year/30 year spread is 2 basis points wider at 80 basis points.

The 2 year/5 year/30 year spread is about 29 basis points. That is essentially the level at which it finished yesterday.

TIPS breakevens are exploding in favor of the TIPS and to the detriment of the holders of nominal bonds.

The breakeven on the 10 year is now 195 basis points. I marked that at 188 yesterday.

The movement is even more dramatic in the 30 year sector as the spread has soared to 228 basis points from 218 basis points yesterday.

TIPS are notoriously illiquid instruments and there might be several more days of short covering in that market. In addition, there might be some eager to hedge with Treasury bonds ahead of the refunding.

The bond market has displayed incredible volatility of late and much of that has been intraday. Several factors contribute to that volatility.

Some of it is a function of something as mundane as vacation schedules. At this time of year, many trading desks are staffed by the second team and the second team is often loath to take the same risk as the starting team.

In addition, on Friday morning we are staring at the monthly labor report. I think that takes quite a few players out of the market and worsens an already bad situation.

I suspect there has been additional mortgage hedging over the last hour or so. And comments by former Fed official Laurence Meyer that the Fed will soon end the Treasury buyback program added to the pressure on the market.

Strap yourself in for a volatile ride into the weekend.

Corporate bonds

(3pm ET) Secondary market trading of corporate bonds is very slow today. There are several reasons for that.

Spreads have narrowed significantly and investors are becoming a little resistant.

This is nonfarm payroll week and some participants prefer to wait for that information before making a major commitment.

Others were waiting for the refunding announcement and wished to gauge its impact.

The new-issue market is still active and since some paper still comes at a concession, that venue is attracting some interest, especially from those with a modicum of sticker shock at current levels.

Citibank (NYSE:C) is offering $2.5 billion 5 year notes at a 380 spread. That is rather wide, but it is a testament to the recovery in the financial markets as there was virtually no way that issuer could have raised that money three months ago.

One sector that has lagged in the orgy of corporate bond buying and spread tightening is the insurance sector. There is still concern regarding what will be discovered when the light of day shines on some of the detritus secreted away in insurance company portfolios.

In that regard, Nationwide Insurance Company is offering benchmark size in the 30 year sector at a spread of about 500 basis points over the Long Bond.

The GECC 10 year which priced yesterday at 235 is 210/205 today.