Primary Dealer List Circa 1981

April 24th, 2014 11:57 am

A fully paid up subscriber forwarded this and it is a trip down memory lane and my early days in the bond business. These were the Primary Dealers in 1981 when it was the financial market equivalent of OPEC in its glory years.

Bank of America
Bankers Trust
A.G. Becker
Briggs, Schaedle
Carroll McEntee & McGinley
Chase Manhattan
Chemical Bank
Continental Illinois
Crocker Bank
Discount Corp
First Boston
First Interstate Bank Calif
FNB Chicago
Harris Trust
Kidder Peabody
Merrill Lynch
Morgan Guaranty
NY Hanseatic
Northern Trust
Paine, Webber
Wm E. Pollock
Chas. E. Quincy
Salomon Brothers
Smith Barney
Dean Witter

7 Year Auction Preview

April 24th, 2014 11:50 am

Via CRT Capital an auction preview:

7-year auctions have recently met strong receptions with all three of the most recent auctions stopping-through for an average of 0.4 bp.

• Indirect bidding has been increasing at 7s, taking 43% at the last four auctions vs. 40% at the prior four.  Direct bidding has also increased over the same period, taking 24% of the last four auctions vs. 20% at the prior four.

• Investment fund buying has increased sharply to 41% of the last four auctions vs. 36% of the prior four.  In outright terms, that is $12.0 bn vs. $10.4 bn prior.

• Foreign investors as a % of the auction have increased recently, taking 15% of the last four auctions vs. 14% at the prior four.  In outright terms, that’s $4.5 bn over the last four auctions vs. $4.2 bn during the prior four.

• Technicals are bearish and stochastics continue to favor of higher yields.  Initial resistance will be the week’s yield low of 2.252% and then the 21-day moving-average of 2.240%.  Break that and we look to a volume bulge at 2.18%.  Initial support comes in at the high yield-close at 2.299% and then the recent range-top of 2.323% before the Bollinger top at 2.37%.

We’re inclined to play the averages and note that this benchmark has a strong tendency to tail when 2s and 5s tail do beforehand (73% of occurrences since the 7-year was reintroduced in Feb ‘09). The most relevant risk is an outsized Direct award – although this bidding group has been tame this week, unlike March’s strong bank-inspired demand. Volumes have been average in the sector at 101% of norms for an auction day, but with a weak marketshare at 11% vs. 13% average.

Wood Jay, Treasury Dealership Trader, notes that the issue is cheap, similar to the 5-year yesterday and so the tail at that auction might prove telling.  He adds that we’d need to price-in more of a concession from here for a tight auction and otherwise at current levels he’s expect a lackluster takedown.


April 24th, 2014 10:31 am

Swaps are locked in a very boring range as they have been for the last two weeks. Spreads are probably 1/4 basis point wider today. One trader noted that with the incorporation of the rolls 5s and 7s optically look very tight (5s at 7 3/4 and 7s at 5 1/2). With spreads that narrow he said traders have a propensity to pay and he thinks that is the resting trade in that market.

Corporate Bonds

April 24th, 2014 10:17 am

Corporate bond spreads are unchanged to a tad firmer as they have been most of this week. My favorite source in this sector reports that there is no backing off and that there is a huge pool of money seeking safe sanctuary in the 3year to 10 year sector. He notes that on many days trading is light until late in the day when frustrated buyers end up lifting the offered side.

He pointed to the Citibank perpetual from yesterday as an example of the frenzy for quality paper. Citi sold  $1.75 billion of a 10 year non call fixed to floater perpetual deal. The initial price talk on that deal was around 6.80. The deal priced at 6.30. No typo there and reflects the irrational exuberance of credit buyers. Some day it will end in a vale of tears.


April 24th, 2014 9:57 am

Mortgages opening tighter to Treasuries with 30s 1 to 2 ticks better and 15 2 ticks better. One trader noted slightly lower prices and slightly steeper curve as catalyst for some modest buying.

Range Trading

April 24th, 2014 7:25 am

The folks at Bloomberg news publish a wonderful synopsis every morning of the market in a l piece entitled US RATES/CREDIT DAYBOOK. They have included a very interesting factoid on the trading range in 10 year notes. The authors, James Holloway and Elizabeth Stanton, note that the 25 basis point trading range on the 10 year note for the past 12 weeks is the smallest in the last two decades.In only three other periods has the range been less than 30 basis points.

Via Bloomberg:

* 10Y yield’s 25bp range over past 12 wks is smallest of past
two decades; in only three other 12-wk periods (one in March
2013, two in August 1998) has 10Y yield range been less than

Seven Year Note When 2s and 5s Tails

April 24th, 2014 7:14 am

David Ader of CRT Capital has an interesting data point which is relevant to the auction today. He notes that since the reincarnation of the 7 year note in 2009 there have been 11 occasions when the 2s and 5s each tailed and that led to a tail 73 percent of the time on the 7 year note which completes the cycle.

Via David Ader of CRT Capital:

For some historical context, we looked at what has happened at 7-year auctions in the wake of tails at 2s and 5s.  Since the 7s were reintroduced in February 2009, there have been 11 occurrences (excluding this week), so the sample-set it too small to be truly statically significant, but it’s worth a look nonetheless. When 2s and 5s both tail, 7s also tail the vast majority of the time (73%) with an average tail of 2.3 bp.  That said, there was a stop-through in Jun ‘13 at 0.7 bp and one on-the-screws stop in Dec ‘12.  Beyond the limited sample-size, the other meaningful caveat we’ll offer is that we have not see tails at all three auctions since Jun ‘12.  Said differently, this triple-tail pattern held 100% of the time through Jun ‘12, but didn’t hold at the two most recent occurrences.

April 24 2014 Opening

April 24th, 2014 7:03 am

Prices of Treasury coupon securities are virtually unchanged from levels I recorded at 830PM last evening (in  fact the yield on the 5 year note is the same). Equity markets are mixed with the Nikkei notably lower but other markets higher. In Europe a stronger than expected IFO number has given equities a shot in the arm. The IFO beat expectations of a decline (fueled by Ukraine uncertainty) and increased to 111.2 from 110.7. One analyst noted that there was a real spike in business sentiment on capital spending. ECB major domo Draghi delivered a speech celebrating the 200th anniversary of the Dutch central bank and once again noted the importance of the currency in policy decisions.

The yield on the 10 year note has increased to 2.703 from 2.701. The yield curve is mixed. The 5s 10s spread is at 173.6 versus 173.3 at 830PM. Please note that the roll into WI 5 is about 3 basis points so roll adjusted versus yesterday morning we are about one basis point flatter. Similarly 5s 10s is at 95.4 and roll adjusted that is about 0.7 flatter than at this time yesterday. The 10s 30s spread is clean and need no adjustment and is 0.1 basis points flatter than it was twenty four hours ago at 77.9 basis points.

Clients were better buyers overnight. Real money in Japan bought 5s and 7s. Middle East based clients bought 2s and 3s and central banks bought 10s.

In the US today we receive data on initial claims which should carry some Easter holiday distortion as well as the always volatile report on durable goods.

Today the Treasury will complete the weekly auction cycle with an auction of 7 year notes. The issue is very cheap on the curve. The 5s 7s 10s spread is sort of boring and not subject to a lot of volatility. If we include the WI 7s in the calculation that spread is about 16 basis points. I have not clocked it that cheap since April 4. In addition all of the belly spreads remain at multi year lows against the bond. In terms of absolute yield the market as measured by the 10 year note is about dead center in the 2.82 to 2.60 range which has lulled participants to sleep. I am agnostic on the auction today. The issue is as I note quite cheap on a relative basis but the market is mid range and not screaming to be bought. The 5 year note is similarly cheap and there is no groundswell of enthusiasm driving its yield lower. I think that this auction will go reasonably well at 100PM but I do not see where we will find follow through buyers to move yields lower. In addition the equity market has received support from Apple’s earning and that will weigh on sentiment as indices drive to the highest levels in the annals of human history. So I think I will pass on this one and wait for a chance to buy a tad cheaper later.



April 24th, 2014 6:49 am

Mark Chandler of Brown Brothers on FX markets :

  • Signals from the ECB have not changed:  they are prepared to do more, but there is no strong sense of urgencythat would encourage a view that action will take place in May.  Draghi and Knott have already spoken today and Constancio is due later.  Next week’s flash reading of April’s CPI is the next event that could prompt a change in views.  
  • The flash PMI reading suggests the euro zone economy is continuing to recover.  Fears that events in Ukraine and sanctions on Russia would slow the German economic locomotive have eased this week.  Yesterday’s strong flash PMI readings for Germany have been followed by a stronger than expected IFO survey today.  All three components (climate, conditions, and expectations) improved.
  • The other important development in Europe has been the sharp fall in excess liquidity in the euro system.  It fell EUR22.5 bln yesterday and now stands below EUR100 bln (at EUR92.9 bln) for the first time since 2011.  The risk is that overnight rates become more volatile and elevated, and that financial conditions tighten.  While the Fed is tapering and the US economic recovery is well ahead of the euro area, the fact of the matter is that the overnight interest rate in the euro area (EONIA) is twice the US (effective Fed funds).  
  • In addition to this, there is the region’s growing current account surplus and there continues to be strong foreign demand for European assets.  Spain today sold a 10-year bond at record low yields.  Given the decline in inflation and the sharp fall in re-denomination risk, amid a world of low returns, the yields offered in the periphery have drawn investors.  In addition to sovereign, corporate, and bank bonds, reports suggest keen interest in bad loan portfolios and other distressed assets.  Today’s reports that General Electric is in talks to buy France’s Alstom for $13 bln (or more), which represents a 25% premium over current market value, is indicative of the wider flows into Europe.  
  • Separately, as widely expected, the Reserve Bank of New Zealand hiked its cash rate 25 bp to 3.00%.  The statement that accompanied it was a bit more hawkish than many, including ourselves, expected.  This sent the New Zealand dollar to almost $0.8640 (from ~$0.8590).  The bears have not given up.  The Kiwi could not sustain the gains as the June hike (and two more this year) have been nearly fully discounted in the OIS market for some time and it has returned to levels seen prior to the hike.  A break now of the $0.8560 area would be an exceptionally bearish development.  
  • The US dollar has been confined to a JPY102.20- 102.70 range for the fifth consecutive session.  Comments from Japanese officials and anecdotal reports suggest, like the ECB, that the BOJ does not appear to be in a particular hurry to ease policy further.  Tomorrow’s CPI reading (not so much the national March report, but the April figures from Tokyo) will be the first official report since the sales tax increase.  There have been some press accounts of Japanese businesses raising prices on top of passing through the tax increase.  Seasonally, Japanese businesses tend to review prices at the start of the new fiscal year.  
  • In the US, weekly initial jobless claims and durable goods orders today are expected to be consistent with the expanding US economy.  However, the data are not sufficient to generate much of a change in the statement by the FOMC at the conclusion of its meeting next week.  
  • The Chinese government has moved forward on more SOE reforms.  Overnight, 80 infrastructure projects were approved for private investment, ranging from IT infrastructure to clean energy projects.  The official statement suggests that the next targeted areas could be oil and gas, public utilities, water conservation and airports.  The core of the idea is simple: to rely more on the private sector to support growth.  Implied here is the message that no big stimulus programs are forthcoming by the government.
  • The reaction is local equity markets was less than enthusiastic, with the Shanghai Comp down 0.5% on the day. Although further details are a welcome development, this is not exactly a new initiative.  For example, the rail sector had already been opened to some mixed ownership models.

Euro vol: Very Low

April 24th, 2014 6:33 am

Kit Juckes is an FX analyst with SocGen and he points out in the opening of his morning note this morning that three month vol on the Euro (currency) versus the mighty greenback is as low as at is has been since August 2007. That was just at the point of the early eruptions of the financial crisis.