Bond Market Close Feb 27 2009

February 27th, 2009 4:43 pm | by John Jansen |

Prices of Treasury coupon securities posted truly bifurcated results today as the yield curve steepened dramatically. The yield on the 2 year note slid 6 basis points to 1.03 percent. The yield on the 3 year note dropped 7 basis points to 1.42 percent. The yield on the 5 year note fell 5 basis points to 2.02 percent. The yield on the 7 year note fell 4 basis points to 2.70 percent.


In the long end of the market it is a decidedly less friendly picture. The yield on the 10 year note increased by 4 basis points to 3.03 percent. The yield on the 30 yield bond increased 3 basis points to 3.70 percent.


Against that background and some simple arithmetic juggling, one can observe that the 2 year /10 year spread is wider by 10 basis points at 200 basis points. One seasoned veteran with whom I converse believes that the unending flow of long end paper will send the 2year/10year spread to 250 basis points on the next 90 days.


The 2year/5year/30 year butterfly which it is my custom to follow here has richened by 8 basis points to 69 basis points from 61 basis points yesterday.


The 5year/7year/10year butterfly has moved to 35 basis points from 38 basis points at the close yesterday. Most of that is the steepening of 7year/10 year which has moved from 27 basis points to 33 basis points.


In an earlier post I cited some reasons for the steepening. I think that there is one point worth repeating and there is one point to add.  Much of the price action represent street longs after two weeks of heavy supply. An ancillary cause is a month end trade which never materialized. The longs needed to hedge positions and decided to sell 10s and 30s against their positions.


Over the course of the afternoon I did locate some traders who had observed real end user selling from investors who were casting their financial vote on the Obama budget.Those sellers looked at the budget and apropos Roberto Duran fighting Sugar Ray Leonard they cried, “no mas.”


Ergo, we end up with a much steeper yield curve.


Regarding that supply one economist with whom I speak believes that at some point this year the Treasury will sell Long Bonds on a monthly basis (currently eight times per year) and in a back to the future moment will seriously weigh reintroducing 4 year notes and 20 year bonds on a quarterly cycle.


If that came to pass that would take me full circle as that would constitute the financing cycle when I began working for a primary dealer (Chase Manhattan Bank) in May 1981.


Separately, the announcement next week of 3s, 10s and 30s should bring $32 billion, $16billion and $12 billion, respectively.


There were several pieces of economic data available today. Economists at HSBC that the employment piece of the Chicago Purchasing Managers survey was the second lowest reading in the history of that report.


JPMorgan economists reported that the steep downward revision in Q4 GDP resulted from adjustments to trade, inventory and consumption. The adjustment to inventory should aid and abet any nascent recovery in the second half of this year.





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  1. 7 Responses to “Bond Market Close Feb 27 2009”

  2. By Bman on Feb 27, 2009 | Reply

    John, have a good weekend and thanks for your thoughts.

  3. By bob on Feb 27, 2009 | Reply

    John, what ever happened to that postponed CDS unwind that was supposed to happed couple weeks back..has that been rescheduled for next week?


  4. By sbenard on Feb 28, 2009 | Reply

    I must have missed this yesterday, but thought it was significant:

    “While the Bernanke hearings were underway, CNBC decided to take a break in the coverage and shoot over to America’s most recent gladiator for free markets: Rick Santelli; the bringer of truth (only in the past couple of weeks) and tea parties.
    “Santelli had an interesting bit of news to share with the world’s viewers of cable television. He reported that for the first time the cost to insure U.S. debt with credit default swaps had risen to 100 BP. In other words, it will now cost you $100,000 to insure $10 million worth of Treasury debt for 5 years against default. That figure has increased 5-fold since shoes started dropping in September of 2008. Prior to financial markets going from beauty to beast after the collapse of Bear Stearns, the cost to insure government debt against default was near 1 BP; what can you say about a 10,000% increase in a few short years?”

    Here is the link to the full story:

  5. By sbenard on Feb 28, 2009 | Reply

    And this tiny tidbit from Bloomberg:
    “The U.S. government has pledged more than $11.6 trillion in the past 19 months on behalf of American taxpayers to bail out banks and stimulate economic growth…


  6. By K T Cat on Feb 28, 2009 | Reply

    John, I just wrote a long thought piece on my blog that has led me to the inescapable conclusion that th Obama Administration’s plan all along has been to print money to cover the debt. Selling Treasuries at auction is just a game of 3 Card Monty. Anyone who buys these things is a sucker. The more they sell, the less they will have to print, but in the end, they will have to print and print in very big numbers. A trillion, perhaps, and they know it

    Once they do so, everyone holding dollars will start seeing their value drop. Everyone holding Treasure will see the same. The Chinese and other foreign investors are getting sucked in only to see the value of their holding undercut as the Fed revs up he printing presses.

    We’re goig to make a lot of people very angry very soon.

    I have to admit I’m still a novice at this, so I might be totally off-base. I just don’t see any other way to generate $2T+.

  7. By K T Cat on Feb 28, 2009 | Reply

    That should read “Everyone holding Treasuries will see the same”

    The battery on my wireless keyboard seems to be dying.

  8. By David on Feb 28, 2009 | Reply

    I would be interested in knowing what you think about Puerto Rican general obligation bonds. They are on the brink of downgrade to junk. This could be the canary in the coal mine for munis.

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