Prices of Treasury coupon securities plummeted today as the weight of supply and anticipated supply weighed on the market. Deleveraging continued and the lack of balance sheet motivated selling. Traders report that many relative value strategies have blown up and the volatile nature of the market place has forced many to the sidelines.For example, one can follow a butterfly trade involving the 5year/7 year/10 year portion of the Treasury curve. One trader noted that the spread traded at plus 13 basis points less than a month ago. The 7 year portion of the curve approximates the bond contract. With much of the Treasury market in fail status, mortgage desks began hedging their detritus with the note contract. That began the cheapening process of the sector.
The Treasury delivered a body blow to the sector yesterday with the issuance of $40 billion of paper in that sector. When I spoke with a trader a little while ago the 7 year was now 100 basis points cheap to the wings of that butterfly.
Lacking balance sheet there are no firms or proprietary capability to step in and warehouse securities and the market sinks into a dysfunctional fetal position. That is the current state of the bond market.
Since I began this closing commentary piece for this day the stock market went over the edge with another very steep decline. I searched for a story or a rationale and I think that the rationale is in the credit markets.
IBM raised $4 billion today with the sale of 5 year, 10 year and 30 year bonds. I will relate the story of the bond in the 10 year sector.
I shall begin with the IBM bond which matures in 2017, which is one year shy of the bond that the company offered today. It is not exactly the same but we can compare. That bond traded one month ago at a spread of about 170 basis points to the 10 year Treasury. Yesterday, a salesman with whom I converse, (and friend of the blog) sold some to a customer of his at T+265 basis points.
Today when IBM offers the new 10 year bond the market forced that gilt edged untainted by the credit crisis technology company to pay T+388 basis points. It was over 120 basis points cheaper than a comparable bond traded yesterday. That is a sign to me that the credit markets are in the direst state and that funding is drying up for corporate America.
Can you imagine the result if a financial company other than JPMorgan or Wells Fargo visited the market and tried to raise funds? There would be no takers for a host of large cap financial names or smaller regional bank names.
I have said this before and risk redundancy but more and more it seems likely that the resolution of this crisis will be an historic financial calamity. Each and every step which central banks and regulators have taken to resolve the crisis has been met with failure. In the beginning, the steps would produce some brief stability. In the last several days, the US Congress (belatedly) passed a bailout bill, the Federal Reserve has guaranteed commercial paper and in unprecedented coordination central banks around the globe slash base lending rates. Listen to the markets respond.
The market scoffs as Libor rises, stocks plummet and IBM is forced to pay usurious rates to borrow. There is no stability and no hiatus from the pain. It continues unabated in spite of the best efforts of dedicated people to solve it.
We are in the midst of an unfolding debacle. It is happening about us. I am not sure how or when it ends, but the end, when it arrives, will radically alter the way we live for a long time.
Whoever wins the US election and takes office in January will need prayers and divine intervention.