A daily bond market chronicle
Swap Spreads are wider across the curve today.
Two year spreads are a basis point wider at 31. Five year and 10 year spreads have each leaked a basis point wider at 29 1/2 and 10 1/2, respectively.
Thirty year spreads are 2 basis points wider at NEGATIVE 12.
**Mortgages not particpating much in rally and are wider by ~1
to 1.5bps across the stack. Higher dollars bring origination
and MBS have had trouble finding clearing levels with 4.5’s
north of 102. Better selling yesterday also has an overhang in
the market and we expect mortgages to lag given the amount of
orignation and paper floating around over the last couple
session. 15yrs have cheapned and provide a better alternative
for those lookign to stay invovled in MBS.
Here is an interesting piece from the Bureau of Labor Statistics. The 2008 one shot payments to taxpayers as stimulus in 2008 were largely ineffective. Taxpayers used nearly 70 percent of that money to pay down old debt or for savings. Only 30 percent was actually spent.
- 5yr Snr Broker CDS: GS 103/108 (+2), MS 136/141 (+2)
- CDS Index: IG13 101.25/101.75 (+2)
The New Zealand dollar is leading the move lower against the dollar and yen, and highlights concern about possible moves by various countries to limit currency gains. Today’s pressure on the New Zealand dollar stems from official comments from the Treasury and from the opposition Labour party. According to a local press report, the Treasury argued that significant tax reforms and the front-loading of fiscal policy followed by cuts in government spending could take pressure off monetary policy and weaken the New Zealand dollar for several years while opposition Labour party leader Phil Goff said the party could no longer support the central bank’s policy of targeting inflation, and instead supported a shift in focus to the external sector and the promotion of a stable currency. The comments from the Treasury appear to be emerging from a study on “options for reform” and actual policy decisions may take more time to decide upon and implement. That’s in contrast to some emerging economies like Brazil that have introduced clear forms of capital controls. Still, with heightened concerns that countries are taking action to try to limit currency gains, and with some market participants likely beginning to wind down positions ahead of the year end, the New Zealand dollar has given up over half of this month’s gains. The Australian dollar is also under pressure amidst more talk of a large sell order possibly related the US private equity group, TPG and Blum Capital’s, sale of their shares of Australia’s Myer’s Department store for A$2.2bln.
One trader reports via email the HKMA purchased a rather chunky $ 2.1 billion US dollars overnight.
Prices of Treasury coupon securities are registering virtually no change in overnight trading.
As I peruse the news ,there is not one story which jumps out and grabs me as particularly pithy. And I guess I am not alone as the US bond market manifests virtually no movement.
An examination of various small pieces of data does yield, I think, one theme at least in the overnight trading. It appears that risk reduction is a minor theme overnight.
European equity futures are posting declines , albeit modest ones. The futures market indicates that the US stock market will open with a modest decline.
The dollar has gained against the Euro and has slipped versus the yen. The dollar and the yen are repositories of risk and that slippage indicates a modicum, of risk reduction is underway at least for this one session. I also note that gold has declined modestly as has oil.
If that mentality lasts for more than a day it will redound to the everlasting benefit of the US taxpayer next at which time my close personal friends at the US Treasury will offer $ 115 billion in 2 year notes, 5 year notes and 7 year notes to the unsuspecting investors.
As we turn the pages on the calendar and careen towards year end, I suspect that there should be more risk aversion in front of us. Anyone who has had the prescience to own various types of spread product this hear has made piles of money.
Prudence would dictate that some choose to monetize a portion of those profits as traders lock in the potential for a shiny Porsche or a share of a slug of weekends in the Hamptons.
There has also been a bit of an epiphany regarding Federal Reserve policy. I think that the Bernanke speech was very dovish and it resonated with the sceptics n the class. I think that a reasonable chunk of the unbelieving have shifted to the view that the extended period will be quite extended and the initial beneficiary of that change of heart will be the 2 year note which will be attractive versus shorter expensive paper.
With the supply announcement later today we will have the forward rolls into the WI issues. One set of analysis which I have observed suggests rolls of about 6 basis points on the 2 year note, 5 basis points on the 5 year note and 4 basis points on the 7 year note.
The yield on the 2 year note is dramatically unchanged at 0.745 basis points. The yield on the 3 year note is unchanged at 1.27 percent. Likewise the yield on the 5 year note is unchanged at 2.19 percent and the 7 year is unchanged at 2.89 percent. The yield on the 10 year note has slipped a basis point to 3.36 percent and the yield on the Long Bond has edged lower by a basis point to 4.29 percent.
The 2 year/10 year spread is a basis point narrower at 262 basis points.
The 10 year/30 year spread is 93 basis point. I still love being long 30s versus 10s at this spread as I think that the belly will cheapen versus the wings for the supply event next week.
The 2 year/5 year/30 year spread begins this day at 65 basis points.
Preview: UBS est jobless claims 500k, Philly Fed index 15.0, LEI +0.2%
(1) The trend in new jobless claims (cons 504k, UBSe 500k, after 502k) has been downward. At 520,000, the latest four-week average was the lowest level since November 2008. The upcoming report will cover the week including the Veterans Day holiday. The holiday has generally not caused a bias in claims readings in earlier years, but the difficulty of seasonally adjusting for the timing of holidays always raises the potential for extra volatility. (2) The index of leading economic indicators likely edged up in September (UBSe: 0.2%, cons: 0.4%, after 1.0%)—its sixth consecutive monthly gain. We project that the coincident index will be reported -0.1% in October after no change in September. (We cut our earlier projection after the weaker-than-expected industrial production data in October.) (3) We forecast a modest gain in the Philadelphia Fed manufacturing survey in November (UBSe: 15.0, cons: 12.2, after 11.5 in Oct). (4) Fed officials Fisher (4:45pm EST) and Plosser (11:45pm EST) are scheduled to speak.
Today I will be gone for the afternoon. I have a meeting in the big city.
My apologies and normal blogging will resume tomorrow.
The Treasury market is posting mixed results today in very quiet trading. Traders focused on comments from Saint Louis Fed President Bullard which the head line writer suggested that the FOMC would not tighten until 2012. That is an open question and is subject to varying interpretation.
In my opinion the Treasury curve will undergo a series of bullish flattenings. I would take the substance of the Bernanke address of earlier this week as the foundation for a belief that the funds rate will stay at or near zero through next year.
That belief will force investors out the yield curve in search of performance.
Here is an example or examples of why I believe that happens. At the current time the Treasury 3 1/2s 12/15/2009 are offered at a yield on Negative 24 basis points. The bid side I undestand is a little above zero. As far out the short curve as the 2s of February 2010 which are offered at NEGATIVE 2 basis points there is no yield.
In the Tbill market the December 17 bill will trade at about 3 basis points. (A bit of inside baseball here. Bills are far more liquid than the nearby short coupons so they trade cheaper.) Bills all the way out to August 26 2010 trade no better than 20 basis points.
In my opinion that pricing structure will force buyers to move out the curve as the mountain of cash seeks better returns. I think that the 2 year note will eventually trade around 60 basis points as folks for whom the 2 year note is a long duration instrument seek better returns.
For that reason I would not short the 2 year note.
For me the final cathartic trade will be a bullish flattening trade in which that logic extends out the curve. An investor who rarely travels beyond the 5 year note will decide that the funds rate will be zero for the rest of out natural lives and with funds so constrained there will be no mark to market volatility.
The extra 115 basis points of yield betwen the 5 year and 10 year will be seductive and he will march to 10 year land. I tink that this is a six month to a year process but when it finishes I would not be surprised to see the 2 year/10 year spread inside of 200 basis points.
I am not a maven of the Japanese market nor do I think that our situation is as dire as what they have experienced but it is worth noting that the 2 year/10 year spread in that market is about 105 basis points.
The Treasury market is very quiet today and customer involvement is modest. There has been some business associated with deal pricings.
The Long Bond trades with a stench and is back to + 93 versus the 10 year note. I remain secure in the belief that it will trade into the mid 80s for the supply next week.