Across the Curve

Mendoza Line and Other End of Day Musings

Prices of Treasury coupon securities surged in a memorable day of trading capped by a global equity meltdown (and subsequent recovery)  and a surprising 75 basis point rate cut by the Federal Reserve.  Movements in the equity market entranced Treasury traders and for the forseeable future the fortunes of bond traders and bond holders will be anchored to the meanderings of that market.

The weakness in stocks and subsequent ease by the Fed resulted in a remarkable move in the configuration of the yield curve. As is its custom, the 2 year Treasury was the superstar of the day as its yield dropped 28 basis points to about 2.07 percent.  (Prior to the opening of trading in New York it had breached the 2.00 percent level and its yield was similair to the batting average of a weak hitting below the Mendoza line infielder at 1.98 percent.)  The yield on the 5 year Treasury dropped by 24 basis points to 2.62 percent while the ever popular 10 year Treasury registered a decline in yield of 14 basis points to 3.48 percent.  The 30 year bond was the market’s stepchild today and its yield fell by 4 basis points to 4.23 percent.  At that level it is about 10 basis points from the lowest recorded level in human history as it flirts with the 4.125 percent level attained in the halcycon days in the summer of 2003.

Following the FOMC statement the yield curve steepened out to 150 basis points between the 2 year maturity and the 10 year maturity.  Subsequent profit taking reduced that spread to the 140 basis point level which prevailed prior to the Fed rate cut.

Most dealers with whom I spoke reported light customer volume and two way flow.  The only two recurring themes were that of profit taking in short paper as well as in very long paper.

The agency market was pretty quiet as  participants dealt with sticker shock engendered by the low yields.  Spreads widened across the curve with 2 year spreads wider by about 4 basis points and 5 year and 10 year paper 1 basis point to 2 basis points wider.

Swap spreads tightened by 1 basis point to 3 basis points in the belly of the curve on receiving by convexity types.  The 30 year year spread tightened by 4.5 basis points on receiving associated with some exotic options trades.

Corporate bond spreads are unchanged to a tad wider in a market also characterized by lack of activity.   One seasoned and grizzled veteran with whom I spoke remarked that the only bids extant were from professionals reeling in shorts.

Mortgage spreads moved tighter as many speculators were caught short that basis.  With the Fed practically pre-announcing ease at its next conclave short positions will be reined in until the dust clears regarding Fed policy.

JJJ