Treasury Market
December 3rd, 2008 5:12 pm | by John Jansen |Prices of Treasury coupon securities, on balance, registered very modest gains today in featureless trading. The yield on the 2 year note slipped one basis point to 0.88 percent. The yield on the 3 year note fell 3 basis points to 1.06 percent. The yield on the 5 year note fell 3 basis points to 1.60 percent. The yield on the 10 year note dropped one basis point to 2.67 percent and the yield on the Long Bond is unchanged at 3.14 percent.The 2year/10 year spread is unchanged at 179 basis points.
The 2year/5year/30 year spread is 85 basis points.
I do not have a good story today. I thought that Treasury yields would trend a little higher today after the recent prodigious gains. They still have a bid and buyers emerge on dips. Maybe this is one of those weeks when we observe the lowest yields immediately ahead of the employment data.
4 Responses to “Treasury Market”
By kristi on Dec 3, 2008 | Reply
ndk,
Thanks for the Mankiw piece (earlier post); that was indeed very interesting. I understand what he is saying about how they demonstrate a pseudo-optionality. He would have to do a lot of work to test the theory that this is behind the weird valuation of TIPS in the current market environment, which he does not do in the blog entry.
The problem I see is that the liquidity premium will always be a caveat in this discussion because it is more difficult to quantify than other characteristics. It could be a major component in valuation, but people would still look to other elements for this reason.
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John,
Do you expect that today’s news about Paulson’s plan to lower mortgage rates considerably will drive T yields even lower? If mortgage rates fall to the levels that they are talking about, MBS investors still holding the instruments will have to fix their duration in a major way, right?
By Joe on Dec 3, 2008 | Reply
You don’t have a good news story today? Mind if I post one (about TIPS): http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDiE9Rt8Hbbs
Let me throw out some not-a-professional back of a napkin calculations that came to mind about TIPS yields:
In a bad recession, inflation goes down, as the recession is more powerful than the inflationary effects of stimulus. Eventually, the recovery causes inflation to rise.
Using my very rough calculations, after the 2001-2003 stimulus, it took about 5 years, but CPI eventually hit about 5.5%. Of course, the current stimulus is much larger than last time.
Traditionally, 5 year notes yield about CPI + 200.
Let’s assume that the T-note’s liquidity premium eventually returns to historic norm, even if it takes a couple of years. That leads to a very rough calculation that in 5 years, TIPS should yield CPI + 200, and T-notes (longer than 5 years) should yield 7.5%.
Very rough, I admit, but the current values are just plain silly.
By Dan on Dec 3, 2008 | Reply
The stimulus in 00-03 was lowering lending standards and the official Fed endorsement of alt-a/sub-prime mortgage products. That’s a much larger stimulus than we’ve seen thus far in 2008.
By Dan on Dec 3, 2008 | Reply
Also, since these brilliant marketers announced their “intention” it will put people on the sideline who would’ve been ready to throw money away purchasing today…they will be waiting for the 4.5% rates now.