Closing Comments December 09 2008

December 9th, 2008 5:52 pm | by John Jansen |

Prices of Treasury coupon securities surged today, as waves of buyers emerged across the Treasury curve. One dealer noted that it felt as though investors were short duration and needed to own something. He observed pension fund, money manager and insurance company buying of the long end. I also heard of fairly healthy buying in the corporate bond market.The Treasury market was well bid most of the day but the results of the one month bill auction were a catalyst for additional buying. That auction of $30 billion one month bills resulted in an average yield of zero. Nada. Nil Zero.

The result has two other interesting aspects. If you did bid zero percent, you received an award of only 82.27 percent of what you bid for. Additionally, the Treasury received more than $126 billion in bids for this instrument. It seems to me that they should have hit every bid.

What is going on in the front end? Central banks have flooded the system with money and the system is awash in a surfeit of liquidity. That money is searching for a home.

I also think that very large chunks of money which left the stock market and money funds when Lehman crumbled is in government only funds and that creates a tremendous demand for bills.

December is always a month with bill demand as the process of sanitizing balance sheets for year end examination is always a concern. With the trials and tribulations in the financial markets this year that demand will be orders of magnitude larger than normal.
One last point, which a veteran salesman and former portfolio manager, made to me is that the money raised by financial institutions via the FDIC bonds is exacerbating the situation. The borrowers do not need that money now. They are defeasing maturities which will arise in 2009. So that money will sit in the short market until it is needed next year.

In the bill market one has to venture out to the three month bill before he can locate a positive yield and at the moment that yield is just a meager single basis point. The three month bill has traded with a yield of negative one basis point, too.

The yield on the 2 year note has declined 10 basis points to 0.83 percent. The yield on the 3 year note has declined 10 basis points to 1.12 percent. The 5 year note was the superstar today as its yield slumped 13 basis points to 1.60 percent. The yield on the 10 year note fell 9 basis points to 2.65 percent and the yield on the 30 year bond inched closer to 3 percent as its yield fell 9 basis points to 3.06 percent.

The 2year/10 year spread is a basis point wider at 182 basis points.

The 2year/5 year/30 year spread which I marked in the mid 50s last night is 69 basis points.

Mortgages lagged swaps by just 2 ticks.

Two year swaps spreads narrowed 1 ½ basis points to 117 ¾. Three years spreads widened 3 ¼ basis points to 113 ½ basis points. Five year spreads widened 4 ¼ basis points to 98 ¼. Ten year swap spreads widened 4 ¼ basis points to 30 ¼. Thirty year spreads widened 5 ¼ basis points to NEGATIVE 34 ¾.

The IG 11 is closing about 6 wider at 266.

Agency spreads marched tighter. Two year spreads tightened 6 basis points. Five year spreads narrowed about 3 basis points and 10 year spreads narrowed 8 basis points.

FNMA priced $3billion 5 year bonds at T+121 basis points and the issue is 112 bid late in the day.

Sorry to compress it all into one big piece today.

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  1. 4 Responses to “Closing Comments December 09 2008”

  2. By jomiku on Dec 9, 2008 | Reply

    It’s like the Maxwell Smart routine, “Would you believe the 1 mo T-bill yields less than nada? Then would you believe I a fleet of stealth fighters is circling overhead waiting to strike? Well then would you believe my cat bites when you scratch its ass?”

  3. By ed.eskimo on Dec 10, 2008 | Reply

    The Japanese have been saying “zero yield” for along time. What else should we learn from them,
    Domo Arigato Mr. Salaryman? These are strange times.

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