March 27 2008 Closing Commentary

March 27th, 2008 3:49 pm | by John Jansen |

 Prices of Treasury coupon securities have registered losses today. The losses in the front end of the market are slim while in the longer maturites there is a bit of a crater. The yield on the 2 year note increased by 4 basis points to 1.70 percent and the yield on the 5 year note increased 7 basis points to 2.56 percent. The yield on the benchmark 10 year note jumped 8 basis points to 3.53 percent and the once proud Long Bond has been humbled once again as its yield ratcheted higher by 10 basis points to 4.40 percent. The 2 year/10 year spread has widened by 4 basis points to 183 basis points. That is actually a tad understated.The market rolled to the new 2 year today and it is about 2.5 basis points to the February issue which we were quoting yesterday.If we compare to that issue the spread is 186 basis points.

Many countertrending forces buffeted the markets today. Economic data were not unambigulusly friendly and that weighed on sentiment. Final data on Q4 2007 GDP show the level unchanged but a more friendly(for the economy) mix. The revised figures show stronger consumption and lower inventories which at the margin is a plus for the current quarter.

Separately,initial jobless claims are still in soggy terrritory but they were not as weak as expected and since bond traders always take solace in the hardship and penury of others this was a source of discontent for the rentier class.

The tsunami of issuance continued with the auction of $18 billion 5 year notes. The issue came at a slight concession to the market but the level of indirect bids was strong. Real money buyers emerged after the auction to lend some stability to the market.

The equity markets bounced around but finished sharply lower on the day . There was an unfounded( obviously) rumor early in the day that Lehman was filing for bankruptcy but the company spoke of its good health and castigated the short sellers( whom I deem honorable folk and practioners of a too often maligned art). Lehman stock closed down about 9 percent and it dragged down some of its finacial cousins. Goldman slipped 4 percent and Merrill was off 5.6 percent.

Another cause of concern was the result of the first TSLF operation conducted by the Federal Reserve to sop up unloved and difficult to finance collateral. The Fed offered the street $75 billion of Treasury collateral and took a similar amount of toxic paper from the street in return. The so called stop out rate was 0.33 .Here is what I think that means:According to the footnote on the Fed website the stop out rate is approximately equivalent to the spread between the Treasury general collateral rate and the general collateral rate for the pledged security over the life of the loan. That means that the person who got financed at 33 basis points received finacing for this unloved stuff at only 33 basis points over Tresury collateral. That seems to indicate a lower level of stress in the system than some had expected. Additionaly the level of interest in the new facility os light as only $86 billion of bids were received for $75 billion of Treasury collateral.

This means that there will be a surfeit of GC collateral sloshing through the system tomorrow and should pressure bill rates higher tomorrow.

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  1. 2 Responses to “March 27 2008 Closing Commentary”

  2. By Fullcarry on Mar 28, 2008 | Reply

    Wow!

    Its Friday morning and treasury GC is trading at 2.35!

  3. By John Jansen on Mar 28, 2008 | Reply

    Thanks for the update. i had several great sources on that one. Old pros with good insight.

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