Prices of Treasury coupon securities plunged today as hope that legislators would pass some bailout package later in the week sparked a stock market recovery which has, as I write, erased over 50 percent of yesterday’s plunge. The stock market recovery reduced the safe haven bid for Treasury debt and motivated the heavy sell off.The market is very illiquid as the unprecedented volatility turns already gun shy traders even more risk averse.
The yield on the 2 year note has jumped 32 basis points to 1.98 percent. The yield on the benchmark 5 year note has catapulted by 32 basis points, also, to 2.99 percent. The yield on the 10 year note has skyrocketed by 26 basis points to 3.84 percent and the yield on the Long Bond has jumped 20 basis points to 4.31 percent.
The 2year/10 year spread has narrowed 6 basis points to 186 basis points.
The 2year/5year/30 year spread has narrowed to 31 basis points. The 5 year note is 31 basis points rich to the wings of the butterfly. Within the last two weeks that spread traded as much as 75 rich to the wings so the 5 year note has dramatically lagged the 2 year note and the 30 year bond.
One of the traders with whom I regularly speak and whose opinions are regularly anonymously offered here suggests that there are good reasons for the underperformance. I do not wish to overstate the case or be some alarmist in the night. And it is the observation of one trader at one firm. He notes that some of the large central bank buyers of the belly of the Treasury curve have been conspicuous by a slowdown in their accumulation of Treasury paper.
He opines that the huge growth in reserves in China and in the petrodollar states and their purchases of Treasury debt made the 5 year point inordinately expensive. He notes that China has slowed its purchases and suspects that countries which derive revenue from oil are investing less,too.
The 5 year has generally traded rich to 2 year paper and 30 year paper the last several years. This trader remembers that in the early 1990s that the range was plus 60 to minus 40. So he thinks that the combination of heavy issuance from the Treasury and lighter demand from the overseas contingent could lead to a significant change in the valuation of the intermediate portion of the Treasury curve.
Another trader recounted horror stories in the long end of the Treasury curve. That sector has been replete with rumors of hedge fund liquidations of off the run long bonds. He cited the saga of the August 2026 issue which has cheapened 7 basis points to 8 basis points versus the Long Bond. Each basis point is worth $1443 per million. Do that math and you will find out that a small position would have caused much pain quickly.