Closing Comments January 29 2009

January 29th, 2009 5:56 pm | by John Jansen |

Prices of Treasury coupon securities plummeted today as overwhelming supply overwhelmed the markets. The 2 year note actually fared reasonably well amidst the carnage as its yield increased just 4 basis points to 0.94 percent. From that point on the carnage was rather heavy as paroxysms of selling drove yields higher. The yield on the 3 year note increased by 9 basis points to 1.32 percent. The yield on the 5 year note increased 12 basis points to 1.81 percent. The yield on the 10 year note soared 18 basis points to 2.85 percent. The yield on the 30 year bond vaulted 17 basis points to 3.59 percent.

The yield on the 30 year bond has now increased over 100 basis points from its modern era low of about 2.50 and the yield on the 10 year note has surged over 80 basis points after flirting with 2.00 percent.

The recent rout began with the FOMC statment yesterday and the realization that the Federal Reserve  would not be rescuing the street from its underwriting duties in the near term.

There was a poor street set up for the masive auction of today and bidding interest was not robust.

The debacle in the Treasury market engendered selling in other markets as originators and servicers sold as the higher yields forced their moves. Some responded by paying in swaps.

The corporate market was a source of unease ,too, as corporate Treasurers flooded the street with new issues. I have recounted some of the major issues in earlier posts. By my reckoning over $15 billion of corporate supply hit the street today.

The imminent refunding is a worry as he ink will barely dry on this round of issuance when the next round begins.

The House passed its version of a fiscal stimulus package yesterday and the reality is that when the Senate pases its version it will compel the need for even more money.

Likewise, the “bad bank” solution to the financial crisis as the Treasury will need massive amounts of money to finance those purchases.

In addition, to the servicer and hedge fund selling I did hear of hot money selling out the curve and money managers establishing steepeners. One dealer noted real money buying but his clients excerbated the trend as their purchases were concentrated in the 2 year/5 year sector.

One trader noted,and I concur, that traders are now engaged in a game of financial chicken with Federal Reserve as traders attempt to force the Fed’s hand. The Fed has no desire for higher rates and the higher rates defeats the intent of the myriad of plans it has implememted to fight the financial crisis. I do not know what level on 5 year or 10 year notes would invite Federal Reserve coupon purchases. However, in this fragile environment such a level does exist and I think that the street will now probe to discern that level.

The 2 year/10 year spread widened 8 basis points to 187 bsis points.

The 2 year /5 year /30 year spread cheapened a tad to 89 basis points.

Other butterfly spreads cratered. The 5year/10year/30 year spread moved about 10 basis points,with the 10 year cheapening.

Likewise, 2year/5 year/10 year moved 11 basis points with the 5 year cheapening on that spread.

The cheapening in each instance reflects the heavy paying in swaps and the heavy selling by mortgage servicers and originators.

The salient point is that supply has overwhelmed the buyers and it will probably require higher yields to ultimately clear the market.

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  1. 15 Responses to “Closing Comments January 29 2009”

  2. By Doug P on Jan 29, 2009 | Reply

    A properly pessimistic prognostication on the poor performance!

    But will Bernanke be bullied into buttressing his buying bluff?

  3. By John Jansen on Jan 29, 2009 | Reply

    Not bad!!

  4. By Steve on Jan 29, 2009 | Reply

    This is going to be frickin’ awesome to watch.

    Disclosure: Long Gold Oil and other Natural Resources that all of this money will be chasing very soon.

    PS: Anecdotal evidence, 3 kids laptop meals at KFC with an extra leg for each meal was $18.
    That’s ONE EIGHT DOLLARS = $2 per leg and $1 per mashed potato and gravy and 1$ for 6ozs of milk each.

  5. By BL on Jan 29, 2009 | Reply

    Meat products are lagging indicators of inflation due to time to raise them.

    Given reports of across the board wage cuts at major companies, it seems the fed is losing to deflation, for now.


  6. By Dave in SV on Jan 29, 2009 | Reply

    “The salient point is that supply has overwhelmed the buyers and it will probably require higher yields to ultimately clear the market.”

    Won’t this be a recurring theme for 2009?
    Thanks, Dave

  7. By Bob on Jan 29, 2009 | Reply

    I am not trying to advocate a bullish or bearish position saying this … I really want to hear someone explain something to me:

    Assuming Bernanke wants to buy longer dated notes/bonds, what is he going to buy them with? The Fed already spent all its money and then some

    Do they print money?

    Borrow short term and use the proceeds to buy long term?

    I don’t see what real resources Bernanke has to work with?

  8. By John Jansen on Jan 29, 2009 | Reply


    Ben just revs up the printing press.

  9. By Gregor on Jan 29, 2009 | Reply

    your blog is a must read. literally.

    well done. (understatement)

    Now that the 27 year bull market in government debt is coming to an end, I hope you’ll keep blogging through the bear.


  10. By jonathan on Jan 29, 2009 | Reply

    Thought this was particularly cogent.

  11. By Greg on Jan 30, 2009 | Reply

    Can we put them in jail for counterfeiting?

  12. By MW on Jan 30, 2009 | Reply

    The issue is not rates, it’s spreads (corporate, mortgages, etc.). Buying Treasuries will not necessarily reduce those.

  13. By Kevin Mackey on Jan 30, 2009 | Reply

    Doug P., your post was awesome!

  14. By Steve on Feb 1, 2009 | Reply

    MW —

    I’d like a deeper explanation of what you mentioned — that buying treasuries will not necessarily reduce interest rates. This is highly intriguing to me. I’d like a better understanding of what you said.

    I read a lot. However, I don’t see much regarding what the longer-term consequences of all this will be — if it doesn’t work. No one seems to even want to talk about “if it doesn’t work”. It’s almost taboo to even suggest it. “It just has to,” they said. Well, no it doesn’t! We don’t know that it will. They are playing God with our economy and using it as the biggest guinea pig in human history. Well, what if the great chemistry experiment doesn’t work? What if it blows up?

    As far as I’m concerned, it seem to be pure lunacy to suggest that we continue to spend without restraint, borrow without restraint, and then print money without restraint to buy that same debt. It just doesn’t pass the smell test. How can we keep printing staggering amounts of money just to buy staggering amounts of our own debt? At some point, the chickens must come home to roost and the piper must be paid. The longer we continue the charade, the more catastrophic will be the consequences, it seems to me.

    What will be the consequences? Hyperinflation? Where are the voices of prescience that are warning of the consequences if this gargantuan chemistry experiment fails? Please let me know!

    Thanks, John, for a great blog. Bonds are a mystery to me, despite that treasury futures are my favorite futures to trade. Your blog is a shaft of light in the darkness!

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