Agency Market

March 20th, 2009 2:17 pm | by John Jansen |

I think I will be employing the word “quiet” quite frequently as I compose these little sector vignettes this afternoon.

The agency market was quiet today and spread movements were mixed. Paper out to 4 years was tighter by 1 basis point to 3 basis points. The Federal Reserve is buying within that sector Monday and anticipation of those purchases was supportive of spreads.

Spreads in the 5 year sector and 10 year sectors drifted wider by 1 basis point to 3 basis points.

There was litle sponsorship from dealers or investors and the active retail flow observed following the FOMC announcement has faded.

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  1. 8 Responses to “Agency Market”

  2. By Greg on Mar 20, 2009 | Reply

    John — since Bernanke has pretty much shut down the government bond markets, and has definitely destroyed all sense of market price discovery; is there any point in reporting spreads anymore?

    Like you, I have watched b-fly and spread levels for years to get an indication of credit and economic activity… but as prices are now officially set by political decree, the spreads have little if any meaning

    The Agency – Treasury basis has no meaning anymore — the prices of both are set by committee.

    I have enjoyed your blog over the years, and I wish you continued success. But it would appear that the bond market is not going to be the place to be the next few years.

    I know the mess of the markets the last few days is the immediate effect of Bernanke’s QE shenanigans — but I fear it will not be temporary. The bond vigilantes are all retired, and now it is only a question of when China will realize they have been had.

    The government’s spending plans are truly something that we would expect from Hugo Chavez, not a competently run economy.

  3. By Bman on Mar 20, 2009 | Reply

    Greg – don’t give up the cause – there are still a few of us left.

  4. By Foxwood on Mar 20, 2009 | Reply

    You (government) talk about the greedy. It’s big government that’s greedy. Stop the taxing and spending NOW! It’s my money! I know better how to spend it!

  5. By John Jansen on Mar 20, 2009 | Reply


    I guess I am not quite as despondent as yourself. There are seemingly always opportunities to trade.

    And look at today. I just posted on the MBS market and from what participants tell me the originator selling (which began late yesterday) overwhelmed the Fed purchases. So there is a trade there.

    I think the bond market will still be an important financial fulcrum. The Treasury literally has to raise several trillion dollars this year. They cant do that in a vacuum.

  6. By Bman on Mar 20, 2009 | Reply

    Please, everyone read the Federal Reserve Press Release more carefully – “the Committee decided to purchase UP TO $ 300 B of longer-term Treasury securities over the next six months”.

  7. By Greg on Mar 20, 2009 | Reply

    John– I agree there are still lots of things to trade, but not US Treasuries. The casino has officially announced that the games are fixed so that no customer will ever win. I don’t want to play in such a casino.

    I was really saying that a spread to a politically determined price/yield has zero economic meaning

    The Treasury market has no investment basis to it anymore. You are right that you can still trade it anyways — you can also trade on a roulette wheel or the roll of a dice. Neither of those has any investment merit to them. But more crucially, you have to be a fool to trade/bet on a loaded dice.

    Bman — you are right that they said “up to” $300 billion. As Bernanke discovers just how foolish this announcement is, I suspect the reality will be a very small percentage of that… but the damage is done.

    Once the US government officially announces that the debt market is a ponzi scheme, it won’t really fix things if a while later they are forced to announce “just kidding!”. The credibility is already lost

  8. By Bman on Mar 20, 2009 | Reply

    Greg – I agree with your “damage is done” comment. I imagine a few people got carried out on Wed. I still think it will be very interesting out the curve in the battle between pension funds, investment flow, and supply.

  9. By Greg on Mar 20, 2009 | Reply

    I would love to hear John (or whomever) explain how bid/ask spreads are going to remain anything close to what they were… if a market maker can lose 5% at the whim of a politician, that has to get reflected in a much wider bid/ask

    Investment funds… if the market becomes less liquid, then it becomes much more difficult to create alpha. Without liquidity, arb trades become much more risky. How do you do a b-fly trade if you can’t sell short? If you can sell short, the haircut will have to be much much bigger (and thus the trade much less profitable). And if you make a directional bet, you need a much bigger move to overcome the wider spreads if you are right (and if you are wrong your losses will be bigger).

    Essentially the Treasury market becomes buy and hold to maturity — and you don’t need lots of traders or PMs to do that (or bond blogs)

    As for pension funds… HA! I would love to hear how anyone thinks they can defease 7% liabilities with a bond that yields half of that. Unless you have a liquid market, active trading isn’t going to make up the other 4-5%.

    Most of the government bond markets around the world are FAR less liquid than the US. Even mighty Germany had a failed auction a couple months ago. The US used to be (past tense) the lone exception. Probably not anymore

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