Opening Comments October 10 2008

October 10th, 2008 7:45 am | by John Jansen |

Prices of Treasury securities are registering mixed changes in overnight trading. “Mixed changes” in this environment is somewhat puzzling and even a bit troublesome.

The US market has always represented the ultimate safe haven venue yet this morning according to my screen at about 700AM New York time the yield on the 2 year note was actually several basis points higher than where it closed late yesterday. Indeed, the yield on every Treasury issue is higher than the level at which it finished in late trading yesterday.Is this the beginning of the end for the dollar and the Treasury market? Is this the first sign of the bursting of the bubble in Treasury securities? That market, in a sense, represents the ultimate bubble as it exists at the whim and caprice of foreign investors, who have as participants in a Faustian bargain, financed our war(s) and our lifestyle so generously over the last decade. Maybe even that bizarre construct is crashing about us as we speak.

I can only say that with financial markets in full retreat and full meltdown it is thoroughly uncharacteristic for prices of Treasury coupon securities to be lower.

The yield on the 2 year note has climbed 4 basis points to 1.59 percent. The yield on the 5 year note has jumped 11 basis points to 2.77 percent. The yield on the 10 year note has climbed 5 basis points to 3.83 percent and the yield on the Long Bond has edged higher by just a single basis point to 4.12 percent.

The 2year/10 year spread is 224 basis points.

The 5 year point on the curve has taken a drubbing since Tuesday. On Tuesday, I closed the 2year/5year/30 year butterfly at minus 56 basis points. At the current time it is minus 17 basis points. That means it has underperformed the wings by 39 basis points. One can blame the Treasury with its surprise reopening of $40 billion of securities for most of that movement.

I do not have much to add as you can see for yourself the carnage all about us.

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  1. 23 Responses to “Opening Comments October 10 2008”

  2. By texalope on Oct 10, 2008 | Reply

    I know optimism is difficult but maybe this is a sign that money will be going into equities. Treasury yields are low and the waterfall of money going into world economies is likely to cause inflation down the road.
    It’s not a leap to believe there are better opportunities than treasuries at these prices.

  3. By Marcus Hunt on Oct 10, 2008 | Reply

    texalope! I fear Gordon Brown has more chance in
    a straight hand to hand fight with Sporticus!

  4. By SS on Oct 10, 2008 | Reply

    Another slant would be cash coming out to pay off the LEH CDS settlement — although I’ve been blaming that for everything but the sunny weather in the last day or so. :)

  5. By fatbrick on Oct 10, 2008 | Reply

    Cash has to go to somewhere. The question is where.

  6. By Fullcarry on Oct 10, 2008 | Reply

    Great post! The action in the treasury market is truly stunning. Year end balance sheets must be really stretched for longer term treasuries to be selling off like this.

  7. By TraderX on Oct 10, 2008 | Reply

    Markets are closing early today, holiday on Monday – wouldn’t be surprised if some short-term traders are closing out their long positions ahead of the extended weekend. At this point in the game, no one knows what the Fed or Treasury will do next, and they seem to love making the “surprise” decisions over the weekends lately.

  8. By Fullcarry on Oct 10, 2008 | Reply

    2s/10s yield spread now 230bps.

  9. By jck on Oct 10, 2008 | Reply

    John:
    the market is heavily distorted by massive fails, repos on gc are at 0 bid, no offer (nobody lending paper) across the board,
    long bond off the run 3 points b/a spread.
    I think Krugman said that Hank was playing russian roulette with the system when he let leh go bust. Yep and the bullet is out of the gun, lay low.

  10. By Milton Arbogast on Oct 10, 2008 | Reply

    Now, I can understand a Faustian bargain. Here is the problem. Bush ardently promoted war and lifestyle: he advocated going to the mall after 9/11 to show “the terrorists” that they hadn’t won.

    Fine. But old Mr. Bush needed help. You betcha he needed help. And it turns out that one man, just one man, was there to help: [rhymes with wingspan].

    So, in my humble opinion, there was a Faustian bargain, but I wonder if the American public would understand it if they saw it?

    Why do I say this? For a very simple reason. The public has responded to the current crisis in a rational way: cutting back spending and reducing debt. They would have responded in that way after 9/11, if they had been counseled to do so. They weren’t.

    So what was Bush’s enabler’s Faustian bargain? I leave that to your imagination. But I daresay it had everything to do with war and nothing to do with lifestyle.

  11. By Don Davis on Oct 10, 2008 | Reply

    Milton Arbogast: The Devil is ever hard to see when he is doing his best work!

  12. By Milton Arbogast on Oct 10, 2008 | Reply

    Don Davis: I agree. Even when he is doing it in public with all the cameras on him.

  13. By RBH on Oct 10, 2008 | Reply

    In futures at least the relationship noted in the OP began to show up 10/7. In the preceding 12 large down equity index futures moves (>25 big pts on SPZ futures) were accompanied by corresponding up price moves (interest rates down) in U.S. That relationship reversed this week. If there’s a flight to safety/quality, it’s not to U.S. treasuries, and that’s disquieting.

  14. By John Jansen on Oct 10, 2008 | Reply

    Agree on the disquieting aspect.

  15. By Chewbacca on Oct 10, 2008 | Reply

    This weeks reversal was margin call related: selling of treasuries to pay for equity losses. Most glaring example was in japan last night: 1000 points down yet JGB futures down 2 points (as were JGB bonds). Moreso, the fails market in USTs caused 40 billion of surprise issuance. That is a great deal for the market to absorb particularly with little dealer participation/needs due to severe balance sheet constraints.

  16. By Jar Jar Binks on Oct 11, 2008 | Reply

    You were anointed by the Krug Supreme! I’m so commenting in a hallowed blog.

    What might be replacing Treasuries as the new safe investment? Gold spiked this week but seemingly not enough to pick up substantial slack in the Treasury market. Foreign investors and governments used to dump billions into the US mortgage market. Where’s it all going now? Is it evaporating?

    There’s something I don’t understand about deflation. The banks aren’t lending thus we have fewer dollars chasing the same goods and services, thus deflation. Is deflation punishing for debtors just as inflation helps them? The reason I ask is that I know this guy who owes 10 trillion, and his creditors are getting nervous. Curiously he’s also their biggest customer so they’re cutting him some slack for the moment.

  17. By www.slycapital.com on Oct 11, 2008 | Reply

    The endless talk about the “flight to safety” into the US dollar has been amusing me for months.
    Even more amusing is that every mention of US treasuries seems to have to be accompanied by the phrase “risk free”.
    An economy built on finance, real estate and insurance (with a bit of tech thrown in) with a suddenly impoverished population doesn’t seem like a great bet right now.
    I’m not a huge fan of any currency right now but the CHF is the only safety bet that makes any sense to me.

  18. By jdinct on Oct 11, 2008 | Reply

    What is the CHF?

  19. By www.slycapital.com on Oct 11, 2008 | Reply

    Hi jdinct,
    The CHF is the Swiss Franc.

  20. By Bob Vitray on Oct 12, 2008 | Reply

    What about U.S. silver rounds. Seems to me they’d be a pretty good store of value;and they are something the average working guy can afford. The politicians won’t let the interest rate find its own level for a very good reason. The last guy to do that was Jimmy Carter and the Republicans are still kicking him for that bit of classical economic good sense. Where do you think 20% interest rates came from, the moon. Those high rates were in fact the market’s expression of what the economy needed. It worked, too, until Reagan blew it all.

  21. By John Davis on Oct 13, 2008 | Reply

    If street-level investors have withdrawn a trillion or so from the equities markets in the last few weeks, that money has to go somewhere. If it were to go into those investors’ personal savings accounts, it would help unfreeze credit. In brokerage accounts or swept into the money market it would be less useful to overcoming the current crisis. But there is probably a lag in investors moving the money from brokerages to banks even those the former are perceived as less safe than the latter. So the mid-level policy issue is how to sped-up that movement.

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  23. By Forexfires on Aug 21, 2009 | Reply

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