Bond Expert: Friday Wrap

by: John Jansen

Prices of Treasury coupon securities registered mixed results today. I will begin with the Long bond because its yield declined about a basis point. If you recall our many discussions yesterday, the dealer community took 58 percent of the issue and indirect bidders took 42 percent. It feels as though the issue is very well placed and shorting this issue should be done prudently. The supply in street hands is only $5.8 billion which is smallish.Anyway, this issue registered a 1 basis point drop in yield and is finishing the day around 4.58 percent.

The yield on the benchmark 2 year notes did not fare as well as the yield on that instrument jumped 9 basis points to 2.51 percent. The yield on the 5 year note gained 8 basis points to 3.22 percent. The yield on the 10 year climbed higher by 3 basis points and is closing the day at 3.95 percent.

The 2year/10 year spread narrowed by 6 basis points to 144 basis points.

The 2year/5year/30 year butterfly is59 basis points. That closed yesterday around 70 basis points.

The significant driver of the curve flattening today was the strength in the equity market. There was no flight to quality bid today and the steepness of the curve which reflected fear and the heavy supply from the treasury was no longer necessary.

In addition, there was substantial buying of MBS today and those purchases likely led to the purchase of some hedge in the belly of the curve. The current coupon mortgage is better by 13/32 while the 5 year Treasury is lower by 6 ticks.

Next week is a seminal week as there is a plethora of data which will aid investors in observing the financial landscape with clarity. Among the important pieces of information which will be available next week are Retail Sales, CPI, Initial Claims and Michigan Confidence.

In addition German GDP is up for review as is Japan’s GDP data.

Corporate bonds

The corporate bond market as recorded by the IG 10 did not have an especially swell day. The index is closing the day at 134 ¼ / 135 ¼. That is about where it was this morning at the open and pretty close to the level at which it finished yesterday.Why do I suggest that it did not trade well? Stocks rallied over 300 Dow points and about 30 S and P points. The price of oil is crashing as if this was 1959 and everyone could race out and by a big Oldsmobile with a massive 8 cylinder engine.

Against that background, there must be some embedded trades out there which keep the index sticky and prevent it from narrowing.

There was virtually no trading in secondary cash market.