Bond Market: Feb 25 2009 Close

February 25th, 2009 5:39 pm | by John Jansen |

Prices of Treasury coupon securities tumbled today as investors drowned themselves in the spittle of never ending Treasury issuance. From the perspective of bond traders the recovery in the stock market added to the woes of the fixed income markets. We are approaching a junction at which fundamental economic data does not matter. On Monday the equity markets broke to multi year lows and bonds could not break out of their malaise. Yesterday confidence was at 40 year lows and today existing home sales disappointed. None of that mattered to bond traders who are always poised for the next round of supply.

 

The trading in the secondary market today was a severe disappointment. The auction result by conventional measures was a success. There was a small tail (the distance the auction average yield was from the levels prevailing in the secondary market when bids were submitted) and the indirect bidder total was huge. The conventional wisdom has elevated that data point to exalted status and views it as a proxy for central bank interest. If that be the case, then they were like dogs in heat today and took nearly half the auction. The indirect bidder category took $15.6 billion of the $32 billion auction. I don’t believe I have ever seen that large a dollar award in a coupon auction.

 

The result did not matter as the market quickly turned south. The yield on the 2 year note breached the 1.00 percent level and is trading at its highest yield since late November. The new 5 year note which averaged 1.985 has breached the 2 percent barrier and yield about 2.05 percent.

 

In the subsequent debacle traders embarked on a tried and true strategy as they assaulted the issue which the Treasury will sell next. The WI 7 year note has reached its cheapest level versus the 10 year note at 23.5 basis points and the 5year/7 year/10 year butterfly is at its cheapest level since the announcement at 45 basis points.

 

The 2year/5year/30 year butterfly is now 66 basis points. If I calculate using the old 2 year note the spread is 62 basis points and at that level has moved 20 basis points in two days.

 

The yield on the 2 year note has climbed 8 basis points to 1.09 percent. The yield on the 3 year note has jumped 12 basis points to 1.48 percent. The yield on the 5 year note vaulted 13 basis points to 2.01 percent. The yield on the 10 year note catapulted 15 basis points to 2.94 percent and the yield on the Long Bond surged 10 basis points to 3.59 percent.

The 2year/10 year spread widened 7 basis points to 185 basis points.

 

In addition to the servicer paying I mentioned in an earlier post, I heard of active selling of the front end by hedge funds and proprietary traders.

 

 

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  1. 7 Responses to “Bond Market: Feb 25 2009 Close”

  2. By Dave in SV on Feb 25, 2009 | Reply

    I think we better get used to this….for the next 20 years.

  3. By Counterpointer on Feb 25, 2009 | Reply

    John

    Not sure that 5-year was terribly successful. Over at Calculated Risk this has been canvassed between Bondtangent and me. Introducing a 7-year looks like a hiding to nothing. And I’m not confident how next week’s longer issues are going to go.

    Just somewhere, gut region, it doesn’t feel good.

    C

  4. By John Jansen on Feb 26, 2009 | Reply

    Counterpointer,

    I think the auction itself was quite successful. The aftermath was a debacle.

  5. By Alex on Feb 26, 2009 | Reply

    http://online.wsj.com/article/SB123554066238668421.html

    Mrs Watanabe is going to have to dig deep.

  6. By Counterpointer on Feb 26, 2009 | Reply

    John – hmmm. I’m still frazzled about next week.

    And sorry, it was Bond Girl at CR. But her site is Bondtangent, as you know…!

    I’m going to check in with some contacts today and tomorrow about the long end and may comment here if anything material comes up.

    C

  7. By jonathan on Feb 26, 2009 | Reply

    Drowning in spit is such an attractive metaphor.

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