Part Two

November 20th, 2008 6:06 pm | by John Jansen |

There have been stunning and dramatic moves in the market since wrote my earlier piece. The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.

The 10 year note is trading at 2.997. That is an historic low yield,too.

Here is a late run for the history books. The 2year note yields 98 basis points. The 3 year note yields 1.17 percent. The 5 year note yields 1.88 percent. I have given you the 10 year note and the bond yields 3.44 percent.

Someone told me earlier that I order to earn 10 basis points on a T bill you had to move to April.

The breakeven spread on 10 year TIPS is about zero. The market is predicting no inflation for 10 years.

Mortgages underperformed swaps by nearly 1 ½ points.

Here is a final swap run. The 2 year spread narrowed 2 basis points to 101 ¼ and the 5 year spread narrowed 4 ¼ basis points to 91 ¾. The 10 year spread narrowed 12 ¼ basis points to 13 ¼ and the 30 year spread inverted 26 ¾ basis points to 59 ¾ basis points.

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  1. 23 Responses to “Part Two”

  2. By anon on Nov 20, 2008 | Reply

    I sold some bond futures at 129-00. I hope the market returns to rationality before I become insolvent. 🙂

  3. By David on Nov 20, 2008 | Reply

    Can you explain

    “He said that there structured product trades buried in trading books all over the world which are melting. ”

    Who is making this trade? Investment banks? Why would anyone short the 30 year treasury?

  4. By Ursus horribilis on Nov 20, 2008 | Reply

    Not just shorting; rumor has it there is also *naked* shorting of Treasuries.

  5. By www.ownerearnings.blogspot.com on Nov 20, 2008 | Reply

    “He had no opinion on when this would end.”

    I read that has “He had no opinion on when THE WORLD WOULD end.

  6. By anon2 on Nov 20, 2008 | Reply

    Surely issuance out there could remove that shorting pain? Unless balance sheet constraints preclude you from buying back the actual paper, forcing you to swaps…

    And I guess issuing too much might tip it the other way causing more pain if it is negative gamma and not just duration changes.

  7. By Dave in SV on Nov 20, 2008 | Reply

    Question: I am not a bond guy, so are you saying once these trades are fully unwound, the prices/yields will return to normal? Thanks. (Oh and congrats on being long the 10yr T.)

  8. By vikas on Nov 20, 2008 | Reply

    shorting the 30 year would be done on the expectation of a serious rise in inflation— not a stupid position given what seemed to be the blank checks which Paulson and Bernanke have had.

  9. By Bill on Nov 21, 2008 | Reply

    Sure wish you would explain in layman terms what this means or recommend something to read online..thanks!

  10. By gv on Nov 21, 2008 | Reply

    Vikas

    John writes that “they have been on the books for years”.
    They bet on inflation alright but it has little to do with the blank checks.

    geert

  11. By GreenAB on Nov 21, 2008 | Reply

    thanks for your efforts keeping us up with the crazy markets, John!

  12. By RetiredSwapper on Nov 21, 2008 | Reply

    Is it these CMS spread digitals come back to haunt the market??

  13. By Alex on Nov 21, 2008 | Reply

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aPICcBfCLqrw&refer=home

  14. By Eric Ziegler on Nov 21, 2008 | Reply

    Hi,

    My investment assumption is that a huge bubble is forming in the bond market. Therefore:

    What signal(s) would you look for that would signal to you that the TBT would be a buy?

    What signal(s) would you look for that would signal to you that the PST would be a buy?

    Would your signals be different for each of these leveraged products?

    Do the currencies movements foretell any clues to you?

    Thanks in advance for your time.

  15. By Torp on Nov 21, 2008 | Reply

    “My investment assumption is that a huge bubble is forming in the bond market.”

    There is absolutely no doubt on this one…and I sign on that.

  16. By JT on Nov 21, 2008 | Reply

    Anyone that believes that a bubble is forming in treasuries and puts their money will they mouth is will get wiped out. There will be no bubble in treasuries as this recession deepens and feels like a depression.

  17. By JT on Nov 21, 2008 | Reply

    Anyone that believes that a bubble is forming in treasuries and puts their money where their mouth is will be wiped out. There will be no bubble in treasuries as this recession deepens and feels like a depression.

  18. By Chidambaram on Nov 23, 2008 | Reply

    I’m worried that beginning Monday (tomorrow) or sometime later this week, the US dollar might go into a free fall collapse. The world will change overnight if that happens.
    In fact I’ve been worrying about this all weekend so far …
    We’ve all been looking at the data on increased demand for US Treasuries and interpreting it as increased global faith in the US Treasury. What if that interpretation is not valid?
    Consider what would happen if China, France, Russia, Argentina, etc … the countries that have been rather openly issuing challenges to the US dollar … trigger a sell off in their Treasury holdings …
    The rest of the market will have no choice but to follow, since these official holders of Treasuries are the largest there are …
    A sell off in the Treasuries will collapse the US dollar for sure
    What we’re going by is China’s statement that they’re interested in preserving the value of their forex reserve. What if that game has already ended?
    Once the US dollar collapses, all the other countries in the world will be free to pursue a completely independent monetary and fiscal policy to promote their own domestic economic growth rapidly.
    Besides right now we’re still on Sunday, November 24, 2008 and as of today there’s only a lame duck administration in place. The new administration has yet formed itself officially, and the old one is on the way out.
    What better time for them to trigger a US Treasury sell off than now, if at all they’re considering that option?
    I’m no expert on interest rate swaps. Please could anybody comment on the 30 year swap? Even if you’re not an expert, but just clever at reasoning things out, your analysis would really help.
    If the market is expecting reduced interest rates in future, can that imply the above market position? I might have made a terrible mistake in my reasoning above.
    If Friday’s market movements are really showing the market doubting the full faith and credit of the United States in the fixed interest rate leg of the interest rate swap, what it implies is that we’ve been terribly wrong, thinking all along that since foreign official and private players seem to be buying a lot of Treasuries, it shows their confidence in the US and the US dollar!

  19. By Anonymous on Sep 16, 2009 | Reply

    Is it Yes written interesting, but continuation will?

  1. 5 Trackback(s)

  2. Nov 20, 2008: David Galbraith’s Blog » Blog Archive » The market is predicting no inflation for 10 years.
  3. Nov 20, 2008: Brad Setser: Follow the Money » Blog Archive » Not a good sign: the Treasury once again can borrow for free
  4. Nov 21, 2008: The Yellow Brick Road › Universal margin call
  5. Nov 21, 2008: PrefBlog » Blog Archive » November 20, 2008
  6. Dec 7, 2008: Brad Setser: Follow the Money » Blog Archive » So long, “Great Moderation”

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