BondMarket Close September 01 2009
September 1st, 2009 4:41 pm | by John Jansen |Prices or Treasury coupon securities rallied (mostly) today as the sagging equity market drove investors to the safe sanctuary of the Treasury market. I added the qualifier in the prior sentence because the Long Bond languished as saw its yield increase 2 basis points to 4.20 percent.
The yield on the 2 year note tumbled 6 basis points to 0.91 percent. The yield on the 3 year note fell by the same 6 basis points to 1.41 percent. The yield on the 5 year note declined 6 basis points,too, to 2.33 percent. The yield on the 7 year note tumbled though the Maginot Line at 3.00 percent and is closing at 2.99 percent (four basis points lower). The yield on the 10 year note declined 2 basis points to 3.37 percent.
The 2year/10 year spread widened 4 basis points to245 basis points.
The 10 year/30 year spread widened 4 basis points to 83 basis points.
The 2year/5 year/30 year spread is 45 basis points. At one pint earlier today it had reached 49 basis points so it is off its best levels versus the wings.
Breakeven inflation spreads on TIPS diverged today. Ten year breakevens widened a basis point to 166 basis points. Thirty year spreads narrowed 2 basis points to 202 basis points.
Agency spreads narrowed 2 basis points to 3 basis points today. Swap spreads and corporate bond spreads leaked wider today so it is a great performance by the agency sector today.
The Federal Reserve motivated the tightening in agency spreads today by announcing a change in the manner in which it purchases agency securities. (This change is fodder for the grassy knoll crowd.) Until this point the Open Market Desk concentrated its purchases in off the run securities and avoided the on the run benchmark issues.
That approach had several consequences. It made the agency market less liquid as the Open Market Desk soaked up off the run paper and owned increasingly large pieces of those issues. Dealers would be quite hesitant to offer bonds to clients as covering the short position would be hazardous to a traders health.
So by shifting focus to recently issued bonds the Desk will be able to procure bigger blocks of bonds without further disrupting already damaged liquidity.
In addition, in my experience the Federal Reserve has always bought that which is cheap on a yield to maturity basis. There purchase activity has made off the run paper expensive to on the run paper and this new procedure will allow the Desk to buy that which is cheap on the curve.
8 Responses to “BondMarket Close September 01 2009”
By GYSC on Sep 1, 2009 | Reply
John,
I wonder why the FED would even bother changing the buy criteria when they are about out of cash for the purchases (300 Billion should be met this month, yes?) in the QE program? Do you think this implies an extension in the works or just deploying what is left in a different manner?
By krb on Sep 1, 2009 | Reply
John,
You seem to be ignoring the elephant in the room.
By GYSC on Sep 1, 2009 | Reply
Sorry John,
I mixed up the treasuries QE with the agencies program (so many programs!) which are the focus of the change so my question does not fit. How much is left in the agency program?
By longtime lurker on Sep 1, 2009 | Reply
as one of those “grassy knoll” crowd…
I have to say one thing. If one would say that purchase of defacto gov securities that are “off the run” from money created ex nihilo is NOT monetizing US debt. And you can say this because it went to someone’s bond portfolio before the FED traded created dollars for it.
THEN how can we now say that purchase of current “on the run” issues is also NOT monetizing debt?
Because it did hit someone’s bond portfolio for at least a day or two?
We can all agree that the FED directly purchasing gov debt from ex nihilo money IS monetizing debt. But somehow a fiction of some other buyer holding the debt for a microsecond before repurchase has the power to defy disbelief.
We appear to be on a journey between two poles John. On one pole we have markets where debt is bought and sold by the market and the markets function. On the other pole is where the market does not function and the Government is the purchaser of all.
There is no other way to read this “on the run” purchase as one more step to the pole of market collapse.
Cute terms like buying “on the run” for more “liquidity” is nonsense. If the FED wanted to buy in the 2, 5, 10 year range “off the run” all they have to do is BID ENOUGH. All this “injecting” money in the curve stupidity is now being shown for the lie it was.
What is left of Mr. Market is screaming that rates are headed DOWN in the future. Meanwhile the FED attempts to stave of ruin for another day by making sure Fannie sells her debt.
By Cedric on Sep 2, 2009 | Reply
Hello John
I know you are a big fan of 60s and 70s rock, so I’d thought I’d pass a tip along.
Jade Warrior, an old obscure 70s band, a progressive type featuring quite flute passages interrupted with killer guitar, just reunited and put out a new album called “Now”.
The whole album is pretty good, but the the tune “Lost Boys” is the most addictive tune I’ve heard this decade.
Something to do to fight bond boredom.
By John Jansen on Sep 2, 2009 | Reply
Cedric,
I will check it out.
Thanks.
JJJ
By Joseph on Sep 2, 2009 | Reply
krb, if you are going to throw out phrases like elephant in the room, please enlighten our poor souls as to which elephant you are referring. Thanks