Across the Curve

Some Closing Comments May 09 2008 (Truncated)

 Prices of Treasury coupon securities posted marginal gains today with a surprisingly subdued reaction to the cratering stock market and the announcement from AIG of significant credit related losses. The market has had a pretty decent run off the lows and with the refunding auctions in hand it might take a few days to sort out the next trade. One dealer noted that as the 2 year note creeps toward the 2.00 percent level it should begin to run into a wall of worry and market improvement will emmanate from the longer maturities. The same dealer thought that the recent steepening was a function of the supply and looks for the back end to outperform as the month progresses. In particular it should be noted that with the Treasury refunding there will be a decent index extension trade which should keep the market better bid after the refunding settles.

The yield on the benchmark 2 year note has declined 1 basis point to 2.21 percent. The yield on the 5year note is down by 2 basis points to 2.95 percent. The yield on the benchmark 10 year note is also lower by 2 basis points and it currently yields 3.76 percent and the Long Bond has experienced the same 2 basis point decline and yields 4.52 percent. The 2 year/10 year spread is lower by 1 basis point and is currently 155 basis points.

Next week is an active week on the data front. I will pay close attention to the retail sales data on May 13^th which the pundits project to be flat and 0.2 ex autos. I think it will be instructive to view the number ex gasoline ,too. I have a feeling that it was a great month for service stations and a less than festive time for others in the retail trade. On May 14^th The government release the CPI data for April. Prognosticators expect 0.3 headline and 0.2 core inflation rates. Market participants will be parsing this number to see if the outsized gains in energy prices are seeping into other sectors with delterious effect.

I am meeting my daughter and her husband at the airport. So I am out of here.

Enjoy the weekend.

JJJ

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Corporate Bonds

 The corporate bond market carried a heavy tone today and a market participant with whom I communicate regularly on this sector described the tone as the heaviest in about a month.There was very little trading in the cash market and as the market opened in New York spreads on bank and financial paper were 5 basis points to 7 basis points wider. Industrial names were 3 basis points to 4 basis points wider. He suggested that the only reason that paper was not wider was because so little was trading. The AIG announcement as well as the continuing saga at Citibank is a reminder, a wake call, that all is not yet well and the aftershocks of the credit earthquake will be with us for a while longer. Spreads are essentially finishing the day at the wider levels where they began trading.

Yesterday ATT offered a chunky three tranche $3billion deal. The individual tranches held issue bid and each is better by 1 basis point to 5 basis points today.

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Central Bank Flows

 Central banks had a reasonably large bid in the 10 year note auction early this week as evidenced by the 40 percent taken by the indirect bidding category . This was slightly greater than the historical average of 37.4 percent . One market participant with whom I converse suggests that the central banks had greater interest and did not fill all of their needs at the auction. The conventional wisdom at auction time held that the auction process would be somewhat sloppy and the weight of the 30 year bond auction the following day would temper any rally. Additionally, the Federal Resrve had occupied itself in the days ahead of the auction selling from its portfolio old 10 year series bonds to sterilize the effect of recent innovative monetary policy actions. Additional sales have failed to materialize and the central banking commuity along with hedge funds and dealers has been chasing the market ever since.

The same market participant avers that the central banks have huge appetite for agency and sovereign and supra paper with maturities of 5 years and less. Recently the European Bank for Recostruction and Decelopment sold $1billion of a 5 year bond and it met an enthusiastic reception from central bank portfolio managers.

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MBS

 There was chunky buying of MBS overnight in overseas trading .There was especially strong interest in GNMA paper on an outright as well as against conventionals. This morning hot money and originator selling has moved spreads wider by about a tick versus Treasuries and swaps.

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Overnight Treasury Flow

 Some overnight flow in Treasury market:

Central bank buying in 2 year and selling in off the run 10 years.

Real money selling long end.

Bank sells off the run 5 years.

Hedge fund buyer 5 years.

Bank seller intermediate Treasury.

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OPening Comments for May 09 2008

 Prices of Treasury coupon securities have posted modest gains in overnight trading amidst a news cycle which has generated some angst amongst the equity crowd. AIG initiated the queasy feeling when it announced a gargantuan loss for Q1 of nearly $8billion and credit losses of $15 billion. Oil surged to nearly $125 per barrel and sparked fears of inflation and a collapse of discretionary spending by strapped consumers.And not to be outdone the overnight press is replete with stories that Citibank will look to shed$400 billion of non core assets over the next several years. Most of the preceeding I have lifted from the Financial Times. There are several other stories on the home page of that fine periodical which I will not chronicle here but suffice to say that if you read those in addition to these which I have cited ,then you will quicky race out to buy three month bills and canned tuna.

The yields on each of the benchmark Treaury issues which I normally recount have declined by about 3 basis points. The yield on the benchmark 2 year note is 2.19 percent and the yield on the 5 year note is 2.94 percent. The benchmark 10 year yields 3.75 percent and has rallied 19 basis points since its auction on Wednesday.The Long Bond yields 4.51 percent and has ralled 9 basis points from the level at which it auctioned yesterday. The 2 year/10 year spread is steady at 156 basis points.

The only economic data slated for release is the Trade Balance for March. Econmists expect a slight decline from the previous month.

Equity markets around the globe have trembled in overnight trading in response to the less than festive newa. The Nikkei and the Hang Seng have slipped 2.0 percent and 1.5 percent respectively. Most European exchanges have dropped by about 2 percent. Futures market trading points to a sharply lower open for US stocks when the trading day begins.

The overnight news reminds investors that the residue of the subprime crisis and lingering credit crunch remains with us and will not easily wash away. We are well over a year into this story cycle and even that far along a high profile company such as AIG can surprise participants with a shocking announcement as they just did. Similiarly, the Citibank story is a source of concern. The sheer size ($400 billion) of the assets to be disposed of insures that the process will not conclude anytime soon. Additionally,the announcements by each of these giant companies reinforces the notion that there are more surprises lurking in the wings.

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Some Links for May 09 2008

Neil Sedaka said it best, “Breaking Up Is Hard To Do”!

Oil trading as if it were a dot com stock in 1999.

AIG takes huge hit in credit derivative portfolio and suffers the ignominy of ratings downgrade.

EconWeekly with an interesting ranking of economists.

And an interesting post mortem on the demise of Hillary Clinton’s quest for the Presidential nomination.

With hopes of the Presidential nomination seemingly dashed Senator Clinton might choose to dabble in cattle futures. The best narrative of that story I have read and written by Caroline Baum.

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Closing Commentary May 08 2008

 Prices of Treasury coupon securities have surged today as a conjuntion of diverse factors propelled prices higher. The Treasury successfully auctioned the final leg of the refunding auction with the sale of $6billion Long Bonds. The auction stopped about 2 basis points better than the pre auction chatter and gave the market a bid for the rest of the sesssion. There were also reports of large sellers of the US in favor of Bunds. Additionally, hedge funds and prop desks were sellers of MBS to buy Treasury paper.

The yield on the benchmark 2 year note has dropped by 8 basis points to a yield of 2.23 percent. The benchmark 5 year issue put in a stellar performance and was the issue to own today. The yield on the issue slid 10 basis points to 2.98 percent. The yield on the 10 year note has posted an 8 basis point decline to 3.79 percent and the yield on the Long Bond is lower by 5 basis points and rests at 4.55 percent. The 2 year 10 year spread differential is about unchanged at 156 basis points . It traded as wide as 159 basis points at one point.

MBS are closing 2 basis points wider to Treasuries. Hedge funds and prop desks responded to a rise in vol by selling positions which they owned for some time.At the widest levels of the day money managers bought 5s and 5 1/2s. There was some convexity hedging as the 5 1/2s traded near the 101 dollar price. Originators were active sellers with one dealer reporting that over $1billion had come in for the bid.

Economic data released today were mixed. Many large retailers reported their sales data for April and most posted solid rebounds over March. Pundits agree that the funky timing of Easter overstates April and understates March. So the numbers do not quell concerns which arise from the surge in the price of gasoline at the pump and the soft labor market.

Initial jobless claims spiked down to 365k from a revised 383K in the previous week.The 4 week moving average increased slightly to 367K from 364.5K. Continuing claims remained north of 3mm. Economists at JPMorgan point out that the claims numbers seemed centered around 375K and at that level are not indicating some imminent economic calamity.

Wholesale inventories dropped in March and the decline will probably shave something from Q1 GDP.

Have a great evening.

JJJ

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Agency Debt

Agency spreads are tighter by 3 basis points to 4 basis points  on the day. I heard reports of a very large buyer of this debt and the price action in the brokers markets is supportive of that view. I have not been able to identify the buyer. Traders in that instance had round-up -the-usual-suspect mentality and attribute the movement in spread to a central bank buyer. That is certainly plausible but I could not find direct evidence of that.

One trader noted that it was a day in which even off the run paper traded very well in the broker market. This trader made the salient observation that if there had been a very large buyer and traders were unable to cover back what they had sold, then the logical step is to grab adjacent issues and then look to unwind the position over time.

FNMA has a spot on its financing schedule for an announcement next Tuesday. Traders anticipate that they will bring a $3billion 5 year to market.

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CCorporate Bonds

 Corporate bond spreads are unchanged to a couple of basis points wider today.The highlight of the day was a multi tranche offering from ATT which had the temerity to challenge the Treasury on the day of the Long Bond auction. ATT has announced $1.25 billion 30 year bonds, $1billion 10 year bonds and $750 million 5 year bonds. The price talk is T+ 170,185 and 195 basis points, respectively. At that level the concession to outstanding debt is only about 5 basis points in each tranche.

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