Tumultuous Trading Tests Traders

February 7th, 2008 2:40 pm | by John Jansen |

Prices of Treasury coupon securities plummeted in a tumultuos trading session which was reminiscent of trading in the 1980s. The outstanding 30 year bond traded early in the day with a 111 handle and trades now late in the day with a 107 handle. That’s the way stocks trade! As I wrote earlier the Treasury conducted a 30 year bond auction and the results were less than festive. Trading since that time has been volatile and the issue continues in a downward(price) spiral. As I compose this, the issue is barely off the worst level of the day with a yield of about 4.53 percent. Late in the day it appears that the cheapness of the Verizon deal took a pound of flesh from the Treasury as  some Treasury paper came in against Verizon.

On the day yields have backed up rather dramatcally and the yield curve continues to steepen. The fickle benchmark 2 year note ended its sub 2.00 percent flirtation and is back at 2.03 percent as its yield increased by 11 basis points today. The 5 year yield increased  by 16 basis points as did the yield on the 10 year note. The issues yield 2.81 percent and 3.76 percent,respectively. The bete noir for the day,the 30 year bond, suffered ignominy and misfortune as its yield soared by 18 basis points to 4.53 percent.

The yield curve as measured by the 2 year/10 year spread hit another record wide for the cycle at 173 basis points. That is 33 basis points wider than where it was before the Fed ease a little over a week ago. The 30 year bond has underperformed the 2 year note by 37 basis points in that same time frame. Additionaly,the yield on each of those issues is higher than it was prior to the Fed move(10 year 3.69 and 3.76;  the 30 year 4.38 and 4.53).

The violence of the down trade today is particularly perplexing in light of the economic data which continues to show an economy with multiplying problems. Initial jobless claims dropped from  a revised 378K to 356K this week. The 4 week moving average moved to 335K and at that level it is little changed from the 340K which prevailed early in the month. However,if one excludes the distortion in this series related to the hurricane in 2005 ,this  is the first time we have had back to back readings above 350K since early 2004.

Department store sales were also weak with most of the major retailers reporting soft sales.

Pending home sales declined a greater than expected amount and economists at JPMorgan suggest that it will depress existing home sales.

I  run on once again.


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