Bond Market Close May 21 2009

May 21st, 2009 3:31 pm | by John Jansen |

Prices of  Treasury coupon securities took a derisive shellacking today as the bond market collapsed rather dramatically under the strain of supply issues, and more ominously, sovereign credit concerns. Let me record the carnage first and then address the reasons for the destruction.

The yield on the 2 year note has edged higher by 2 basis points and rests at 0.86  percent. It outperformed every other benchmark issue. The yield on the 3 year note increased 6  basis points to 1.36 percent. You will note the 2year/3 year spread at 50 bass points. One has been paid to buy the 3 year versus the 2 year at that lofty level. The yield on the 5 year note climbed 12 basis points to 2.14 percent.

It really gets ugly in 10 year and 30 year land where the yields on each bond catapulted higher by 18 basis points. The 10 year yields 3.36 percent and the 30 year yields 4.32 percent.

The 2year/10 year spread widened 16 basis points to 251 basis points.

The 2year/5 year /30 year spread is 90 basis points and is virtually unchanged as we pass through this maelstrom.

The 10 year note did take a drubbing on the butterfly versus 5s and 10s as it moved from 22 basis points to 28 basis points.

Much of the carnage today stems from the S and P move to place UK on negative watch.I will talk a little more about that momentarily but the yield curve belies the credit concern story a bit.

The 10 year/30 year spread is 95 basis points. If there was real fear and apprehension regarding the credit worthiness of the USA the 10 year/30 year spread,I think, should be widening. In the debacle which surrounded the failed bond auction earlier this month that spread traded at 100 basis points.  So in my opinion the failure of the spread to reach and breach that level suggests that credit fears regarding the US are overstated.

In a long piece earlier entitled Bond Market Ramble I discussed some of the reasons for the dramatic rise in yields today. Let me add a new twist.

One line of reasoning is that foreign central banks, filled with angst and sweaty palms over the S and P action on the UK, wanted out of Treasuries. They offered bonds directly to the Fed (as part of the buyback operation) and when those bonds did not trade the central banks pummeled bids from dealers. This was a day in which any bid was a good bid.

If one wishes to join the dots together look at the dollar and the grassy knoll inflicted crowd holds that those foreign central bank sellers of Treasuries added to the dollars woes.

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  1. 4 Responses to “Bond Market Close May 21 2009”

  2. By Fred on May 21, 2009 | Reply

    How did corporates fare today ? Thanks in advance !

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

    Great stuff today John.

  4. By Alex on May 21, 2009 | Reply

    “The 10 year/30 year spread is 95 basis points. If there was real fear and apprehension regarding the credit worthiness of the USA the 10 year/30 year spread,I think, should be widening. In the debacle which surrounded the failed bond auction earlier this month that spread traded at 100 basis points. So in my opinion the failure of the spread to reach and breach that level suggests that credit fears regarding the US are overstated.”

    Nice bit of reasoning. Thanks.

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

    i heard mtg tightened again today. true?

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