Closing Comments February 29 2008

February 29th, 2008 2:28 pm | by John Jansen |

 Prices of Treasury coupon securities surged today powered by credit fears, weak economic data and a rapidly wilting stock market. Credit fears emmanate from the ongoing credit crunch and associated deleveraging which has taken mortgage based hedge funds hostage this week. Economic data has been uniformly weak and that the collapse of the Chicago purchasing managers survey and several of its component pieces highlights metastasizing weakness. Finally,the equity markets which have been in denial about the dramatic shift in appetite for risk as well as the slow recognition that the economy is deep in the tank.

Yields on benchmark Treasury securities have plummeted today. The 2year Treasury has seen its yield drop by 18 basis points today and it now rests at 1.63 percent. It has traversed a mini interest rate cycle since Hank Paulson auctioned $26billion of these gemlets on Wednesday as its yield has dropeed aboout 41 basis points from the 2.04 percent auction level. The benchmark 5 year note yield has declined by 19 basis points to 2.49 percent and its yield has dropped 25 basis points since the Treasury minted $16billion new ones barely 24 hours ago. The yield on the 10 year has fallen15 basis points to 3.52 percent and the yield on the bond has dropped 11 basis points to 4.41 percent. The level on the bond is interesting as it is approximately where the bond sat on the day of the dismal 30year bond auction in February. That auction tailed about 4 basis points and led to the bank up in yields which pushed the 10 year back close to 4.00 percent. So this new bond is actually at a profit vis a vis the auction levels and for many traders it will be significant if the old bond the 5 2/15/38 can trade through this level. Since this is where it sat at the moment of that failed auction this level will represent a psycho;ogical barrier for those who sit in market making seats.

Dealers reported active customer involvement today. Some of it was associated with the end of the month indexing and some was associated with the notion of impending financial doom. There was tremendous receiving in the swap market and outright buying in Treasuries by an eclectic group of end users and hot money types. Many of the buyers were also observed entering various and sundry forms of the curve steepening trade. One dealer reported several clients extending on a dollar for dollar basis from the 5 year sector to off the run bond land.

Mortgages underperformed swaps by 13 basis points.

Agency spreads are wider by about 3 basis points across the curve. In an interesting development ,though,the woes of FNMA and Freddie Mac has contributed to the outperformance of Home Loan and Farm Credit relative to the GSEs.

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