November 28 2008 Closing Comments

November 28th, 2008 1:28 pm | by John Jansen |

Prices of Treasury coupon securities posted solid gains in quiet an illiquid post Thanksgiving trading. The bond market will close in two hours at 200PM New York time. There was some month end buying that fueled the price gains.The yield on the 2 year note slipped 4 basis points to 1.05 percent. The yield on the 3 year not fell 3 basis points to 1.33 percent. The yield on the 5 year note dropped 2 basis points to 1.99 percent. The yield on the 10 year note declined 3 basis points to 2.95 percent and the yield on the Long Bond dropped 5 basis points to a near record low of 3.48 percent. As an aside, the Long Bond carries a 4 ½ percent coupon. With the decline it rates it carries a dollar price of 118 24/32. It is much easier to understand that type of premium when you have a 14 percent coupon than when the coupon is nearly 10 points lower. But these are historic times in which we live.

The 2 year /10 year spread is one basis point wider at 190 basis points.

I had not checked TIPS yields in awhile. The 10 year TIPS yields 2.57 percent which implies that the market expects a negative inflation rate of 0.38 percent on average over the next 10 years. And I want to sell you an interest in the Brooklyn Bridge.

Mortgages widened about ¼ point to swaps today.

Two year swap spreads widened 7 basis points to 109 ¾ basis points. Five year swap spreads widened 1 ¼ basis points to 84 ¼ basis points. Ten year swap spreads widened 1 ¼ basis points to 20 ¾ basis points . Thirty year spreads widened 1 basis point to NEGATIVE 40 ¾ basis points.

Next week will another interesting week for the markets. There is a purchasing manager’s survey of manufacturing data on and car sales on Tuesday. Wednesday brings the Beige Book and Non Manufacturing ISM. Thursday there is a fresh report on initial claims and Friday the monthly labor data.

I do not see any relief in those numbers. I guess the key for the week is the reaction to the stock market to the weak data. In the aggregate it will be hard to suggest that the economy has bottomed when one views the totality of this data in conjunction with this week’s data. We will have a chance to observe if the price action in equities was real buying or just happy shorts thanking whichever deity they worship before they reestablish those same positions.

I forgot to mention that Chairman Bernanke will address an audience in Austin Texas at lunchtime Monday. He will discuss the economy.

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  1. 11 Responses to “November 28 2008 Closing Comments”

  2. By ndk on Nov 28, 2008 | Reply

    The 10 year TIPS yields 2.57 percent which implies that the market expects a negative inflation rate of 0.38 percent on average over the next 10 years.

    John, I agree that the pricing is nonsensical, particularly given that they’re guaranteed to pay at par anyway. However, fear of the U.S. treasury defaulting might be one reason why; there could be a risk premium in there now. Just watch the Bounty on the Treasury CDS.

  3. By John Jansen on Nov 28, 2008 | Reply

    what did it do today?

  4. By ndk on Nov 28, 2008 | Reply

    Hit 60 yesterday in thin trading. I made the wrong career choice though, so I don’t have a fresh quote, unfortunately.

  5. By John Jansen on Nov 28, 2008 | Reply

    That makes two of us!!

  6. By John Jansen on Nov 28, 2008 | Reply

    I have a great career behind me

  7. By kristi on Nov 28, 2008 | Reply

    Risk premium? How about liquidity premium?

  8. By ndk on Nov 29, 2008 | Reply

    Risk premium? How about liquidity premium?

    There’s certainly a liquidity premium too, but it’s harder to measure directly, and I don’t think that would affect the HTM value of the TIPS much.

  9. By danw on Nov 29, 2008 | Reply

    With TIPS yield below the treasury yield of the same duration is that not pricing in positive inflation over the next 10 years? That is my (very simple) understanding of TIPS pricing.

  10. By kristi on Nov 29, 2008 | Reply

    But wouldn’t you expect to see a risk premium built into the nominal bond too, if that were the case?

    I confess I do find the idea of people paying for default protection on treasuries fascinating, though. What do people making such end-of-the-world trades think they’ve purchased?

  11. By ndk on Nov 29, 2008 | Reply

    With TIPS yield below the treasury yield of the same duration is that not pricing in positive inflation over the next 10 years? That is my (very simple) understanding of TIPS pricing.

    danw, the Treasury does this calculation for you. If the real yield is above the nominal yield on a Treasury at a given duration, the market is expecting negative inflation during that time. However, a TIPS security is guaranteed to at least pay off at par, and it can’t make negative coupons. That’s why the pricing makes so little sense in the first place, and why I resort to risk premium as the explanation.

    But wouldn’t you expect to see a risk premium built into the nominal bond too, if that were the case?

    Yes, you absolutely would. That might be obscured by deflation, though.

  12. By paul on Dec 1, 2008 | Reply

    what’s the reason for the real yields going down as the time to maturity gets longer?

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