Across the Curve

March 19 2008 Closing Commentary

 Prices of Treasury coupon securities took a wild raucous ride today in another stomach churning volatile trading session.Early in the day the market experienced severe curve flattening which I discussed at length in an earlier posting. The curve is still flatter on the day but much less so than when I wrote earlier in the day. The afternoon trade has been motivated by rumors and stock market weakness. The rumors revolve around hedge funds and deleveraging events. So the more things change the more they stay the same. It sounds more eloquent in French but I do not remember how to say it.

The 2 year note yield has dropped by 12 basis points to 1.47 percent. The issue traded in the 1.60s this morning.The yield on the benchmark 5 year note has tumbled by 12 basis points to 2.33 percent. The yield on the 10 year note has slipped 13 basis points to 3.35 percent and the Long Bond yield is lower by 14 basis points to 4.21 percent.

As I write the stock market is posting a loss of nearly 240 points. I am not a technician but watch it enough to view the break of 1310 on the S and P as a significantly bearish signal.

The Treasury bill market is generally a rather stable and placid domain. But as quarter end looms for most firms and year end approaches for Japanes firms bill rates have plunged to levels last seen when Mamie Eisenhower was popularizing bangs while she was living in the White House. ( I do not believe that Mamie subsequently took time to chase the Republican Presidential nomination after her husband’s term expired in 1960.) If one desires a yield above 1.00 percent on a Treasury bill you will have to march out to mid July to find it. Every bill in front of mid July trades with a zero handle. If you desire the T bill which matures on April 3,you would find them offerd at 11 basis points. The one month bill which the Treasury issued yesterday at 52 basis points has seen its yield drop about 25 basis points to about 27 basis points.

There is an inordinate amount of cash sloshing around the system and that has generated a collateral squeeze and the rush to lower bill rates.The spread between general collateral and Fed Funds was 165 basis points for much of the day and as wide as 225 basis points when repo dropped to zero. The active issues are all very well bid in repo and this is not expected to end until after quarter end. Additionally,this turmoil has been exacerbated by the greater than normal of turbulence in the financial markets.

Have a great evening.

JJJ