Across the Curve

Closing Comments January 08 2009

Prices of Treasury coupon securities are closing the day with bifurcated results. The yield on the 2 year note has edged higher by 2 basis points to 0.83 percent. The yield on the 3 year note edged higher by 2 basis points also to 1.18 percent. The 5 year was the superstar of the day as its yield declined 6 basis points to 1.60 percent. The yield on the 10 year Treasury fell but not as much as the yield on the 5 year as the yield fell 5 basis points to 2.45 percent. The yield on the 30 year bond is unchanged at 3.04 percent.The 2year/10 year spread narrowed 7 basis points today to 162 basis points.

The 2year/5year/30 year butterfly finished the day at 67 basis points. I believe I clocked that Monday morning around 30 basis points.

Why has the belly of the Treasury curve performed so well? I think that it is the huge buying in spread product which in one form or another motivates a subsequent Treasury market transaction as a hedge. Buying in mortgages has been huge and swap receiving would be heaviest in the 5 year and 10 year sector t o hedge those transactions.

The Treasury did auction $16billion of 10 year notes (with the reopening they are actually 9 year 10 month issues) and investors accorded the issue an enthusiastic reception. The auction average was 2.419 percent and that was more than 2 basis points rich to where the issue was freely available in the cash market.

Swap spreads remained narrow. Two year spreads finished the day 6 ¼ basis points tighter at 56 ½. Three year spreads are at 53 ¼ and are 5 ½ better today. Five year spreads are tighter by ½ basis point at 49 ¾ Ten year spreads are better by 6 basis points at 14. Thirty year spreads are tighter by 9 ¾ basis points and are closing at a ludicrous NEGATIVE 15 ¼.

Mortgages are a tick tighter to swaps. There was some selling today by some investors looking to lock in gains so the flow was somewhat more balanced.

The Federal Reserve Bank of New York in its regular weekly release detailed its mortgage purchases of the last three days. They bought a little over $10 billion in securities.