Closing Thoughts March 26 2008

March 26th, 2008 3:37 pm | by John Jansen |

 Prices of Treasury coupon securities registered bifurcated results today as the shorter maturities cruised to solid gains while the Long Bond languished in yield curve limbo.The yield on the benchmark 2 year note dropped by 10 basis points to 1.67 percent and the yield on the 5 year note fell 9 basis points to 2.52 percent. The going gets a little tougher in the 10 year sector as the yield on the benchmark 10 year declined by just 3 basis points to 3.47 percent.And in the land of the Long Bond it was downright nasty as the yield on that instrument marched higher by 3 basis points to 4.33 percent. The 2 year /10 year spread widened by 7 basis points to 181 basis points and the 2 year /30 year spread jumped 13 basis points to 266 basis points.

There were several reasons for the significant curve steepening. There was,in fact,significant selling of 10 year and 30 year paper by real money accounts. These clients viewed the economic reports of today and yesterday as troubling and indicative of a very soft economy with additional injections of Federal Reserve ease likely. Against the background of an easy Fed and a soft economy,these buyers made a beeline for the 2year note . The dealers who observed those trades were able to bid through the market at the auction and cover their risk unobtrusively.

Unobtrusively for themselves but painfully for others who had prepared for a sloppy auction and an “auction tail’. As I wrote earlier, the auction stopped 2.5 basis points rich to levels which had prevailed at auction time and those unhappy shorts spent the afternoon covering their risk in the secondary market.

Regarding the yield curve the buyers of the front end have also posited that last week’s flattening episode resulted from the unwinding of Bear Stearns positions and with that liquidation complete there are no forces prevailing which might derail the 2 year/10 year spread from returning to 200 basis points.

Mortgages tightened early in the day as international accounts bought paper. Originator selling and servicer selling throughout the day swamped the buyers and MBS spreads are closing 2 basis points wider versus swaps.

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  1. 7 Responses to “Closing Thoughts March 26 2008”

  2. By fredw on Mar 26, 2008 | Reply

    John , what are your thoughts on the surprise announcement today by Treasury that it was doing a 26 billion CMB tomorrow ? We’ve seen a heckuva lot of new supply this week , right ? I can’t see how that helps the 5 year auction set for Thursday as well. Are the government’s finances literally falling apart in front of us ? Thanks …..

  3. By John Jansen on Mar 26, 2008 | Reply

    Fred,
    i just looked around at some of the commentary that I receive from dealers and I could not find anything which indicated that the CM bill was a surprise.If you can show me that i will gladly stand corrected. The Treasury generally gives the street excellent guidance on the financing cycle and i would be surprised if indeed it was a surprise. And seasoanlly they do alot of CM bills at this time of year as the flow of income taxes into the Treasury creates some uncertainties. And with the fiscal stimulus package this year cash flow is probably a little more confused than normal

    Regarding supply,the cash managemnet bill supply has very very little to do with the 5 year note auction. The 15 day cash management bill is essentialy a repo transaction and at many shops the repo desk might be as involved in that transaction as the bill trader. And if you consider it in terms of risk it is nearly riskless. In 15 days you get your money back. whereas in the 5 year note you have a reasoanble amount of market risk and can get burnt badly if you guess wrong about near term market direction.So from a risk management point of view these things are apples and oranges.

  4. By John Jansen on Mar 26, 2008 | Reply

    I am beginning to think i am dyslexic. i proof read that about half dozen times and missed the typos. My apologies.

  5. By fredw on Mar 27, 2008 | Reply

    The commentary indicating the CMB was a surprise came from a Lee Adler piece yesterday from the Wall Street Examiner. If that was incorrect , I apologize for any confusion. I guess my main point was with the CMB and the five year note auction on Thursday , a good bit of new supply was being made available. With all of the recent developments , it would be easy for a bit of news to fall through the cracks , so that just may be the case.

  6. By John Jansen on Mar 27, 2008 | Reply

    I will chat with some bill traders this morning but that gentleman is the only distressed at the move. And as I mentioned in my response to you previously cash management bill supply and note supply are very different animals. There is very little risk in a 15 day cash management bill. In the real world of trading room activity ,there is very little hype or noise regarding a CM auction while the 5 year note auction will bring noise chatter and many other trades.
    Returning to the other gentleman’s point that the government’s finances are falling apart,i woulfd suggest to you that if that were even remotely true then it would be the lead story in every financial publication ,the dollar would be in the throes of a freefalling deathspiral and US equity markets would be preparing for an extra shipment of body bags to Broad and Wall.
    I will speak with some bill traders but i think the other fellow is spreading some misinformation. And if i am wrong (like Jerry Orbach in Dirty Dancing) I will say so!

  7. By fredw on Mar 27, 2008 | Reply

    Fair enough ! R eady for 1 pm ?

  8. By John Jansen on Mar 27, 2008 | Reply

    i had to be away for a bit and missed it but i am told it came at a minor concession only and the indirects were strong.

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