Bond Market Close September 28 2009

September 28th, 2009 2:59 pm | by John Jansen |

There is not alot trading so I am going to dispense with my normal close.

The yield on the 2 year not is unchanged at 0.98 percent. The yield on the 3 year note has increased a basis points to 1.47 percent. The yield on the 5 year note has declined a basis point to 2.36 percent. Likewise, the yield on the 7 year note dropped a basis point to 2.97 percent. The yield on the 10 year note has edged lower by 2 basis points to 3.30 percent. The Long Bond is once again the star performer as its yield has dipped 4 basis points and rests at 4.05 percent.

The 2year/10 year spread is 232 basis points.

The 10 year/30 year spread narrowed 2 basis points to 75 basis points.

The belly of the curve is suffering the slings and arrows of most outrageous fortune as the 2year/5 year/30 year spread is now 31 basis points. The spread opened trading today at 34 points.

Why do we see such significant out performance by the Long Bond?

I think there are several reasons. For starters, the hedging of exotic structures which I wrote about continues. And the yen has chosen to remain below the 90 level and will probably do so through quarter end.

With quarter end repatriation flows completed we will obtain a much better read on sentiment when the calendar flips to October.

The other reason for strength in the Long Bond is that some traders have taken to heart FDR’s nostrum that the only thing we have to fear is fear itself. The Open Market Desk has encouraged a worry free environment with its constant repetition of the mantra that the funds rate will remain low for an extended period of time.

That mantra has motivated a return to risk taking. As I have noted here each days volatility is gliding lower. Corporate bond spreads have collapsed dramatically. Stocks are partying as if it was 1999.

I believe that some portfolio managers have gotten caught up in the Federal Reserve rhetoric and have taken it to heart. They are now happy to head out the yield curve and are willing to get yield by buying duration. As one friend of the blog noted in a conversation today , they are treating the 30 year bond as if it is a cash equivalent.

That is a fine strategy as long as the Federal Reserve is firmly on hold and (more important) as long as there is a greater fool out there. At the first inkling that the Federal Reserve is changing course it will be a very ugly exit and bond holders reverse course.

This seems to me to be the sort of risk taking environment which promoted the bubble which caused the recent financial calamity. I wonder if level headed folks at the FOMC might develop a little angst of their own and wonder about the results of their policy.

Maybe the Warsh article was a shot across the risk taking bow. We shall see.

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  1. 13 Responses to “Bond Market Close September 28 2009”

  2. By gorgeous on Sep 28, 2009 | Reply

    I humbly think that the yen will unwind way before people’s max targets. The new finance minister in Japan is all talk now but the story will change once he gets the ropes. That leaves us with the massive deflation folks (I wish them the best of luck, especially to those making long term plays, they will need it), the usual “but we must buy bonds every month” crowd, and the potential short/tbt squeeze. I personally don’t even know if the money to be made from the last group is significant enough for bond folks.

    Anyway long story short I think shorting tlt is right about the good trade here. I can sit on it for a while and average down as needed. I would gladly hear arguments against it if anyone has any.

  3. By James on Sep 28, 2009 | Reply

    I thought there are way more people shorting bond/longing TBT than the opposite.

  4. By Chicken on Sep 28, 2009 | Reply

    “Now is the time for all good men to come to the aid of their country.” Patrick Henry

  5. By BL on Sep 28, 2009 | Reply

    If you believe the Fed is serious about the exit strategy, as they now seem to be, then there’s scope for the dollar to recover in the future, so the LB would return not just it’s 4% but also a currency gain if you’re overseas.

    I don’t know if that’s who’s buying, but it’s something to think about.

    BL

  6. By Cedric on Sep 28, 2009 | Reply

    TBT only has $4B of “assets”. They can squeeze us to zero and it only amounts to one drop of red ink in the bond market universe. So make my day…flatline the yield curve at zero…I’m a tax payer too.

    There are other ways to short treasuries, but I don’t know where to get the “short interest” data.

    So the big story must be “price deflation”. Don’t see why debt deflation (which we have and will probably still get) would make anyone buy a long bond.

    Or they are all nimble traders who will be out before anything bad happens. Or maybe there is a long bond/gold/oil hedge that we haven’t heard about yet? That would be one for people that can’t make up their minds.

  7. By gorgeous on Sep 28, 2009 | Reply

    Thanks everyone for thoughts. I too feel that there may be a chunky hedge trade that bond guys have crafted to keep their bigger brains entertained. Yet I feel compelled that short of a significant country defaulting it is difficult to justify the current rates lasting long.

    I apologize but I definitely do not buy the FED getting out of this mess at zero/negligible cost fantasy. If they could, then we definitely should do it periodically to boost the economy and give our currency the respect that it deserves.

    It would be fun to know the volume of short in the long bond and related futures.

  8. By Farah Fawcett on Sep 28, 2009 | Reply

    I tried to make a visual representation of the following paragraph:

    “At the first inkling that the Federal Reserve is changing course it will be a very ugly exit and bond holders reverse course.”

    I apologize beforehand to the distinguished ladies and gentlemen that read and post in this blog…but I couldn’t resist:

    Visual representation

    I still hold all my short puts positions on TBT.

  9. By Al on Sep 28, 2009 | Reply

    ^ that was funny
    but I’m not sure who’s gonna be Bernanke at the Gran Finale

  10. By Bman on Sep 29, 2009 | Reply

    I think you owe John a little more respect than that.

  11. By Griff on Sep 29, 2009 | Reply

    I find that quite humorous…but as Ron Burgundy would say “you stay classy San Diego”

    I thought JPM / similar ran a weekly update on UST positions…perhaps that was a survey of asset firms instead

  12. By James on Sep 29, 2009 | Reply

    I bet the last thing FED wants to do is to upset the bond market. If interest rate goes up rapidly, everything goes to toilet.

  13. By Bman on Sep 29, 2009 | Reply

    If they want to upset the bond market, just start talking about another stimulus package or more Q/E.

  14. By Robert on Sep 30, 2009 | Reply

    I’ve never thought that low yields on the long bond would be interpreted as excessive exuberance. That’s certainly a novel interpretation.

    I submit that many thoughtful people do not think that there is a lot of yield to be had, and that 4% risk-free looks great, given long term prospects.

    But I think you are in good company. Here is an interesting quote from the Financial Times, in 1995:

    “The market for Japanese government securities has performed well despite problems with the Japanese economy as a whole. The yield for 10 year bonds has dropped to 2.7% in 1995 from some 8% in mod-1990. This leads to concern as to the impact of economic recovery on bonds. The recession looks set to end with fiscal measures to boost the economy. Increased consumption could fuel inflation, and the budget deficit could amount to 5% of Japan’s gross domestic product in the financial year of 1995 to 1996.”

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