Closing Comments November 20 2008: Part 1

November 20th, 2008 5:31 pm | by John Jansen |

Prices of Treasury securities registered solid gains today. That is a bit of understatement as the gains were robust but tempered for maturities of 5 years or less while gains in the 10 year sector and the 30 year sector were spectacular.

In that regard, I will go in reverse order today following the Biblical injunction that the last shall be first, at times. The dollar price of the 30 year bond exploded by four points and its yield declined 21 basis points to 3.69 percent.That yield is an all time low. Former President Clinton often referred to himself as the “Comeback Kid” and maybe we should apply that appellation to the Long Bond. At the auction last Thursday the issue stopped at 4.30 percent. That means that the issue has rallied 71 basis points in one week.

The yield on the 10 year has dropped 18 basis points to 3.14 percent. At the auction last Wednesday the issuance yield was 3.78 percent.

The yield on the 5 year note has declined 8 basis points to 1.94 percent.

The yield on the 3 year note dropped 10 basis points to 1.22 percent. It yields just 20 basis points more than the 2 year note. I think I mentioned this morning but on November 10 when the Treasury auctioned the issue it traded 58 basis points cheap to the 2year note.

The 2year spent quite a bit of the day trading below 1.00 percent and is finishing 4 basis points lower at 1.02 percent.

The 2year/10 year spread collapsed 14 basis points to 212 basis points.

The 2year/5year/30 year spread is 83 basis points. It had traded in the low 90s but the smoking performance of the Long Bond worked to cheapen the 5 year note versus the wings.

Swap spreads are screaming tighter in the longer maturities. The 30 year spread is tighter by 22 basis points and is currently NEGATIVE 55. That translates into a swap rate of 3.05 percent. Ten year spreads narrowed 11 basis points to 14 ½ basis points. Five year spreads narrowed 6 basis points to 92 ½ basis points and 2 year spreads narrowed 1 ¼ basis points to 102 ¼ basis points.

This is truly a historic day and the reasons for the price action are myriad. The plunge in commodity prices has deflation fears replacing inflation fears and has led to some of the grab for yield out the curve.

The truly dysfunctional price action of the 30 year swap spread is a poster child for the fear and panic sweeping the market and is illustrative of the massive deleveraging which continues after 14 months of panic. It is my opinion that no rational investor or trader would receive swaps 55 basis points through Treasuries unless they were compelled to do so. This price action points to a massive unwind of long held positions. Market chatter has blamed the inversion on unwinds of exotic bets. That made some sense when the spread approached zero and in the immediate aftermath of that. But 55 basis points later. Something else is driving the trade.

Most dealers have year end on November 30 (though some have gone out of business) or December 31. That will force year end balance sheet management and will further reduce liquidity.

This stream of consciousness again and I apologize as events are occurring faster than I can put pen to paper. As I was writing this piece stocks have collapsed and that collapse has placed stocks at an 11 year low. The S and P has cracked through the 2002 bear market lows.

JPMorgan stock has dropped 18 percent. Morgan Stanley stock is in single digits and is down 10 percent today. Goldman stock is trading at 52 and is off 6 percent.

Be Sociable, Share!
  1. 11 Responses to “Closing Comments November 20 2008: Part 1”

  2. By Kevin Mackey on Nov 20, 2008 | Reply

    There have been rumors of the US government buying the long bond as an attempt to reduce mortgage rates. Have you heard anything about that and/or do you find that to be a viable option?

  3. By Steve on Nov 20, 2008 | Reply

    Hi: Jim Willie via Financial Sense makes the following statement to demonstrate why it appears that the monetary base is shrinking. Also to show how banks are being recapitalized via swaps of bad debt for treasuries.

    “The USFed has actually drained vast amounts of money from the mainstream USEconomy and its banking system in order to create USTreasurys in sufficient volume to offer them to big banks in swaps of soured and impaired mortgage bonds.”

    Is the reasoning sound? See http://tinyurl.com/6897uf about 1/3 of the way down in the article.

    Thanks

  4. By Tempered on Nov 20, 2008 | Reply

    “This price action points to a massive unwind of long held positions. Market chatter has blamed the inversion on unwinds of exotic bets.That made some sense when the spread approached zero and in the immediate aftermath of that. But 55 basis points later. Something else is driving the trade.”

    Why would you believe the unwinding was over? Many institutions and hedge funds were massively leveraged. They are all deleveraging at the same time but in a controlled fashion. Wouldn’t that account for the actions we are seeing in the markets?

  5. By Majorajam on Nov 20, 2008 | Reply

    To Kevin’s point, though I doubt lower 30 year Treasury yields are in the Fed’s interest (if anything, given the banks ongoing woes, it may be the converse), aren’t mortgages priced off of swaps? Could this gravity defying spectacle be accounted for by Fed policy moves? If not, what big players are out there paying fixed that are deleveraging? It just doesn’t seem to have a substantial constituency.

  6. By Danny on Nov 20, 2008 | Reply

    The 30 year spread is tighter by 26.8 basis points and is currently NEGATIVE 60 !!!

  7. By fatbrick on Nov 20, 2008 | Reply

    If 30 year spread is negative 60 and 30 year bond is 3.5%, does it translate to a swap rate 2.9%? I am sorry if it is a dump question. I never real the long tern swap spread before.

  8. By Danny on Nov 20, 2008 | Reply

    yes! 30yr swap rate is 2.96%

  9. By fatbrick on Nov 20, 2008 | Reply

    Is this becasue people previously were betting on high inflation in long run but now they have to cover or hedge their positions in long commodities for example?

  10. By joe on Nov 20, 2008 | Reply

    If gov’t wants mortgage rates to come down, buying 30 years won’t do anything. What they need to do is explicitly guarantee FNM/FRE or at least invest the $100B in them.

  11. By Kevin Mackey on Nov 20, 2008 | Reply

    Indirectly it could. Of course I could be wrong with this logic, but if rates go down far enough, demand would begin to wane and move into the agency market. So far that hasn’t happened, but I think it is a possibility.

  1. 1 Trackback(s)

  2. Mar 26, 2009: China Considers US Treasuries Still the Best Option | Diario BV

Post a Comment