Closing Comments December 17 2008

December 17th, 2008 4:56 pm | by John Jansen |

Prices of Treasury coupon securities have posted bifurcated results today as investors plot new paths following the FOMC announcement of zero interest rate policy yesterday.The yield on the 2 year note has increased 7 basis points to 0.72 percent. The yield on the 3 year note has increased 8 basis points to 0.97 percent. The yield on the 5 year note has climbed 5 basis points to 1.34 percent.

The results are just the opposite at the long end of the treasury curve. The yields on the 10 year note and the 30 year bond have dropped 7 basis points to 2.19 percent and 2.66 percent, respectively.

Prices have retreated from their best levels across the curve. I believe the low yield on the 2 year note was 0.605 percent. The low print in the 5 year note was 1.185 percent. The low yield on the 10 year note was 2.07 percent and the low yield on the Long Bond was 2.58 percent.

The 2 year/10 year spread has narrowed 14 basis points to 147 basis points. The treasury will announce a fresh batch of 2 year notes tomorrow. Traders anticipate that the forward roll will be 8 basis points and that will place the 2 year/10 year spread at 139 basis points.

The 2 year /5 year/30 year spread is closing the day at 70 basis points after closing yesterday at 88 basis points.

Traders report that the FOMC statement ignited the animal spirits of investors and that most of the flow has been what one would expect. With
the Federal Funds rate on hold for “some time” traders are comfortable owning the back end and owning spread product.

At the very low yields of the day sellers emerged to lock in some profits which have accrued as the historic bond rally proceeded. I have heard from dealers who have observed money manager selling as well as hedge fund sellers locking in gains. Dealers probably took advantage of the levels to establish shorts in front of the supply announcement from the Treasury tomorrow.

Treasury is expected to announce $36 billion 2 year notes and $26 billion 5 year notes.

A friend of the blog reports that the IG 11 is 218/220 which is 20 basis points tighter on the day.

Mortgages are about a quarter point wider to swaps.

Swap spreads moved wildly. The 2 year spread narrowed 6 basis points to 82. Three year spreads tightened 7 ¼ basis points to 76 ¾ basis points. Five year spreads narrowed 1 ¼ basis points to 70 basis points. Ten year spreads moved wider 17 basis points to 17 ½ basis points. Thirty year spreads widened 20 basis points to NEGATIVE 22.

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  1. 2 Responses to “Closing Comments December 17 2008”

  2. By John N on Dec 17, 2008 | Reply

    Hi John,

    Excellent comments as always.

    One thing I’ve always wondered – you always mention the 2/5/30 yr spreads – I’m confused as to what this is telling us/how one trades this. Could you add a little more colour as to its relevance?



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