Across the Curve

Closing Comments November 18 2008

Prices of Treasury coupon securities surged today as persistent buying in the long end of the market sparked a rally across the curve. Money managers and pension fund players in need of duration waved in the 10 year sector and the 30 year sector.The yield on the 2 year note slipped 4 basis points to 1.13 percent and now sits at approximately the all time low attained in the heady days of June 2003. The yield on the 3 year note dropped 5 basis points to 1.43 percent. That issue is trading 30 basis points cheap to the 2 year note. On the day of the auction last week it actually traded at 58 basis points. Later this week the Treasury will announce a new 2 year note for auction next week. The forward roll will be about 7 basis points. That will put the 2year/3year spread in the low 20s and that will make it look very expensive.

The yield on the 5 year note declined 7 basis points to 2.20 percent.

The yield on the 10 year note plummeted 12 basis points to 3.53 spread. I rarely talk about the 5year/10year/30year butterfly. In early September the 10 year note traded 10 basis points cheap to the 5 year and 30 year. At one point prior to the refunding the spread reached 105 basis points and on auction day the spread was 95 basis points. It was very cheap and I think that motivated some of the buyers today. That spread is closing the day at 73 basis points.

The yield on the 30 year bond dropped 6 basis points to 4.13 percent.

The 2year/10 year spread narrowed 8 basis points to 240 basis points.

The 2year/5year/30 year butterfly is closing at a record 86 basis points. The 5 year flattened 3 basis points versus the 2year note while it steepened a basis point versus the 30 year bond.