Prices of treasury coupon securities are plummeting once more amidst violent convexity induced volatility.
It has been an interesting day as I think this move caught many flatfooted. I think many posited a quiet pre employment position squaring session. For much of the day trading volumes have been light and belied the the shifting tectonic plates below the market.
Later in the day the level of activity has quickened as the market penetrated key levels. While the convexity types have been flailing all day like a new born baby that activity has picked up steam over the last hour and several sources cited servicer hedging as the proximate cause of the carnage.
I hesitate too say this and it is probably the death knell for the bear market in bonds but it is difficult to envision any scenario tomorrow in which the market can rally. One has consistently been paid this year to short the supply and cover back later. There has been no reward for buying early. I think that we will see higher yields into the refunding next week and surely a steeper yield curve.
We are in a new age and that new era is governed by supply. There is no refuge from it. It just keeps coming and until there is some sign that the fiscal situation in the US is a road to rehabilitation, the treasury market will remain a cold lonely venue.
The yield on the 2 year note has remained relatively stable relative to its peers as it has risen just 4 basis points to 0.95 percent. The carnage in the three year note is a little worse but not truly painful as the yield on that security has climbed 7 basis points to 1.51 percent. As we trek into the territiry of the 5 year note the markets trials and tribulations become self evident as the yield on that once pristine instrument climbed 14 basis points to 2.56 percent. The yield on the 7 year note rose 17 basis points to 3.32 percent. The 10 year note is the ugly duckling as its yield soared 19 basis points to 3.73 percent. The yield on the still investment grade Long Bond increased 16 basis points to 4.60 percent.
The 2year/10 year spread is at a record 278 basis points.
The 10 year/30 year spread narrowed to 87 basis points from 91 basis points earlier today.
Agency spreads are mixed. Two year paper is wider by about 2 basis points. Five year and ten year paper is better by 2 basis points to 3 basis points.
The Federal Reserve will conduct a buyback tomorrow in the June 2011 sector through May 2013 sector.