Across the Curve

Bond Market Close March 4 2009

Prices of Treasury coupon securities took a header today and tumbled as the resurgent equity market and ever present supply fears weighed on sentiment. Economic data released today (ISM non manufacturing, ADP and the Fed Beige Book) were replete with signs of economic weakness but that cocktail of economic malaise failed to sway buyers.

The yield on the 2 year note climbed 7 basis points to 0.95 percent. The yield on the 3 year note surged 10 basis points to 1.36 percent. The yield on the 5 year note vaulted 12 basis points to 1.95 percent. The yield on the 10 year note increased 11 basis points to 2.98 percent and the yield on the Long Bond jumped 7 basis points to 3.68 percent.

The 2 year /10 year spread widened 4 basis points to 203.

The 5 year note took a drubbing on the curve and is 73 rich to the wings of the 2year/5year/30 year butterfly and is 6 cheaper than yesterday.

Tomorrow the Treasury will announce the March refunding. There will be a new 3 year note and a reopening of the 10 year note and 30 year bond. The consensus is for $32 billion 3 year notes, $18 billion 10 year notes and $10 billion bonds.

Normally when the Treasury sells debt they are replacing some maturing debt. When the debt settles there are also coupon payments from outstanding securities which need to find a reinvestment home. This batch of paper settles on March 16^th (I believe) and there is no maturing debt nor is there a coupon payment that day. The practical result is that the $60billion in coupons which will be auctioned next week will raise all new cash. That is a huge offering and will likely require higher yields and wider spreads. I mentioned last week that an analyst at Greenwich Capital, David Ader, had spoken of rolling auction concessions this year. I think that will be the case as this next batch comes to market and will be a very ugly time for the taxpayers of these United States.

While it was not a very active day I did hear of accounts seeking value across the curve. One salesman noted that he had observed buyers of 12 month to 18 month paper for the carry and roll down. The same gentleman had seen two way flows in 2019 high coupon/low coupon swaps. Another trader reported clients looking for pockets of value along the zero coupon curve in the one year through seven year sector.

Late in the day someone sent me a quote on the GECC CDS. It remains at a level which is not intended to inspire confidence as it is quoted 15/16 ½.

Mortgages outperformed swaps by 5/32 but as one dealer described it performance varied greatly across the coupon stack. Lower coupons (4s through 5s) bested Swaps by 3/32 to 6 32. The 5 1/2 s were unchanged and 6s through 7s actually lagged by nearly a quarter point.

Freddie Mac announced several measures which will make refinancing easier and that led to the clubbing of the premium coupons.

Late in the day Moody’s revised JPMorgan’s rating outlook to negative.