Bond Market Ramble

May 21st, 2009 12:32 pm | by John Jansen |

The Treasury market has cratered. The 10 year note has returned to the 3.30 percent level. Why did we crater?I think I have a solid answer(s) but wish I had thought this through earlier.

In the purest trading sense today is Friday. The treasury just announced $ 101 billion of new supply which will trade next week.

Dealers, as is their custom, establish outright shorts and hedged shorts, to prepare for the bidding process. Certainly much of that process happens in advance of the auctions but the announcement is often a catalyst.

Today it is a special catalyst as tomorrow is a short working day before the holiday and Monday is a holiday. If you wish to have a starter kit short in place one had better get working on it as there is only scant time before the bidding begins next week.

So I think that the short week/ auction supply dynamic is driving much of this.

I also think that there is also disappointment about the buybacks. Today the Desk bought $7 odd billion of nearly $ 45 billion offered. That I  am sure leaves many holders of securities unhappy with their plight.

Dealers report reasonable client flows with hot money selling across the curve and central banks taking aim at the 5 year sector.

The yield curve has broken to new wide levels. As I compose this the 2 year/10 year spread is 244 basis points. The recent wide earlier this week was 239.

For the historians in the room the record wide was in August 2003 at 273 basis points.

The record wide on the 2year/30 year spread was 369 basis points in October 1992. That was interesting as the bond market was experiencing a flight to quality rally as equities cratered in response to the epiphany which revealed that William Jefferson Clinton would soon be elected President (and begin a second long national nightmare which continues even until this day).

Anyway markets suffered anxiety at the thought of a Democratic President and lived without the knowledge that he would usher in a Golden Age.

The 2year note yielded 3.60 percent and the Long Bond yielded 7.29 percent.

One little bond market factoid here: the 3.60 level was the low yield on the 2 year note for the next nine years and it took the horrific and tragic events of September 11 to push 2 year yields through that levels.

Finally, there is a bit of a reflation trade going on here,too. breakeven spreads in 10 year TIPS are now nearly 170 basis points and have moved quickly from 160 to this new level. I do not have the capacity to chart that but if you can you will see that spread breaking out.

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  1. 19 Responses to “Bond Market Ramble”

  2. By vol-trader on May 21, 2009 | Reply

    you guys going to stay short through next week?

  3. By Les on May 21, 2009 | Reply

    TYO – 67.85 – just off it’s all time high; and I am very optomistic.

  4. By Alonaby on May 21, 2009 | Reply

    “as equities cratered in response to the epiphany which revealed that William Jefferson Clinton would soon be elected President (and begin a second long national nightmare which continues even until this day).”

    You’re right. All that prosperity and being held in high esteem by the rest of the world, boy, that really sucked. What a horrible decade the 1990’s was. Sure not like today’s sweet-smelling rose garden of a national existence. I’m just glad my children didn’t have to witness the abundant jobs and uptrending stock market. Luckily for them, I suspect it’s a problem they won’t ever have to face thanks to the magnificent economic revolution we’ve engineered over the past 8 years. Whew. It’s a wonder we survived the Clinton administration at all. Thanks for putting it into perspective for us.

  5. By nades on May 21, 2009 | Reply

    JJ – thanks for the update. Cheers!

  6. By ldguy on May 21, 2009 | Reply

    spanked like a circus monkey!

  7. By FYT on May 21, 2009 | Reply

    CNBC said Gross is saying that there are rumors that the US Gov’t debt could lose its AAA rating

  8. By John Jansen on May 21, 2009 | Reply

    He probably started the rumor!

  9. By Brian on May 21, 2009 | Reply

    Yeah, Gross is a weasel…but a weasel with a trillion dollar arsenal.

  10. By Alex on May 21, 2009 | Reply

    I would have thought UK debt should be dumped in favour of US debt after the S&P shot across the bow this morning.

  11. By FYT on May 21, 2009 | Reply

    Thats a really good point Gross always talks his book

  12. By vol-trader on May 21, 2009 | Reply

    this buy-back thing reminds me of when i was trading JGB last April and May. after the huge run up of march, inflation talk started surfacing and oil began to take off. JGB started to sell off and broke a few trendlines. then they had a 10yr auction that had a big tail. then one day there was a buy back operation that was ridiculously oversubscribed and everyone paniced and the market went limit down. this basically repeated 2 or 3 more times before the lows were made. last spring in the JGB market was insane. sounds kinda familiar doesn’t it?

  13. By flypaper on May 21, 2009 | Reply

    So stocks are cratering, bonds are cratering, where’s all the money going?

  14. By To "Flypaper" on May 21, 2009 | Reply

    To answer your question, “where’s the money going?”

    It’s going into REAL money — gold.

  15. By Allan on May 21, 2009 | Reply

    (I’ve already asked this sort of question here, some days ago)

    If you look carefully, euro, pounds (amazingly, hehe), yens, swiss francs… All of them are appreciating.. I didnt looked at the yields of these currencies, but I`m pretty sure they’re going down…

    The very front-end of the curve (1M, 3M) is also gaining a little…

  16. By Donna Kline on May 21, 2009 | Reply

    What a treat to find your site! I agree that the Clinton years were horrible. There is a general media fascination with a rise in equities as a symbol of properity. When we all know that it was the Reagan/Bush years that led to the economic expansion and the higher taxes (Govt Surplus) of the Clinton years that led to the decline. Let’s not even speak of the contraction of the military which continues to aid the terrorist regime….

  17. By Lee on May 21, 2009 | Reply

    Sarcasm is a weak psychological defense mechanism to hide cluelessness.

  18. By John Jansen on May 21, 2009 | Reply


    Try this.

  19. By John Jansen on May 21, 2009 | Reply


    And this.

    I do not question the fact that W was a disaster. That doesnt make Bill great.

    I have an obsession about him because I cant understand why Democrats treat him as if he is a rock star.

    Here is a little addendum to what I wrote earlier.

    He presided over a debacle for the Democratic party. From FDR until 1994 the Democrats had virtually continuous control of both houses of Congress. I do not know the exact numbers but they were almost always in control of both houses. I think they even controlled the House of Representatives following the Reagan 1980 landslide

    He managed to lose that in 1994 and if had not been for the War the Republicans would still be in control of the Congress. Democrats lost untold power on his watch.

    Furthermore, if he had any sense of decency he would have resigned in 1998. The fact that he remained in office in my opinion led to the election of Bush Jr. Had Al Gore run for President as an incumbent Bush never would have been elected in 2000.

  20. By ejsmith on May 21, 2009 | Reply

    Personally I’m a fan of sarcastic wit. Must be a Gen-x thing.

    I will say that irony is tough to pull off in written prose…… Clarity is paramount.

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