Across the Curve

Bond Market Close October 26 2009

Prices of Treasury coupon securities tumbled sharply today and the yield curve steepened substantially in advance of significant supply from the US Treasury this week.

In addition to the fear of Treasury supply a thin patina of fear and uncertainty regarding the intentions of the mortgae crowd covers the market. As I noted in a prior post, there certainly was some servicer selling today and that contributed to the sell off. However, participants report that the selling was sporadic and modest in size. Some traders thought that much of the selling in the market which forced us to these higher yields was a result of active traders front running the servicer trade.

One trader offered another interesting angle and suggested that the servicers do have a reasonable chunk to sell but many were holding off on those sales as they view the extant price action as a hiccup on the way to supply. The sanguine view of those folks is that once the Treasury completes its round of auctions the market will quickly reenter the 3.50 percent to 3.30 percent range.

The problem with that analysis is that it will be very very messy on Friday if the 10 year is still sitting here or cheaper. The dealer community will be long the auctioned bonds as the servicers begin the hedging endeavor. Add a little rate lock selling into that brew and you can get to 3.75 percent rather quickly.

I hesitate to add this but this week does mark the end of the Federal Reserve’s purchases of coupon securities. They have been the marginal buyer and without them on the bid life could becopme much more interesting (which ids good for blog traffic).

The yield on the 2 year note has climbed 2 basis points to 1.02 percent. The yield on the 3 year note climbed 3 basis points to 1.60 percent. The yield on the 5 yearnote edged higher by 5 basis points to 2.49 percent. The yield on the 7 year note also increased 5 basis points to 3.16 percent. The yield on the 10 yearnote increased 6 basis points to 3.55 percent. The Long Bond increased by 6 basis points to 4.36 percent.

The 2 year/10 year spread is 4 basis points wider at 253 basis points.

The 10 year/30 year spread is unchanged at 81 basis points.

The 2year/5year spread is a narrow 40 basis points.