Bond Market Close May 26 2009

May 26th, 2009 4:32 pm | by John Jansen |

Prices of Treasury coupon securities are tumbling today and the longer the maturity of the issue the more painful the plunge.

The 2year note has suffered the least as its yield increased by 3 basis points to 0.92 basis points. The yield on the 3 year note climbed 8 basis points to 1.46 percent. The yield on the 5 year note climbed 10 basis points to 2.30 percent. The yield on the 10 year note soared 9 basis points to 3.54 percent. The yield on the 30 year bond also jumped 9 basis points to 4.48 percent.

The yield curve is losing its curve and is about to go perpendicular. The 2 year/30 year spread is closing the day at 356 basis points. I have recounted many times here that the widest level for that spread since man has walked erect was at 369 basis points in October 1992. The yields were 3.60 and 7.29 percent, respectively.

The 2year /10 year spread is 262 basis points and it is within hailing distance of its record level of 273 basis points which I believe we touched in 2003 when the Federal Reserve pilots were just receiving their helicopter licenses.

The 2 year/5year/30 year spread has broken down and trades 80 basis points. That  spread had supported at 90 basis points but will probably now trade between 60 basis points and 90 basis points.

Why is the market crashing and why is the curve so steep?

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US.That is why the curve is steepening so dramatically.

Foreign central banks continue to intervene, buying dollars and selling their local currencies. The names most mentioned in that endeavor are Russia and Brazil. Sources tell me that the fruits of the intervention are parked in 2 year notes and 3 year notes. There is a dearth of central bank interest in the longer maturities.

Some cite the very strong 2 year note auction today as a sign of the market’s health. I think not. The issue is propped up by the prospect of a very low funds rate for an extened period of time. The carry and ride down the curve profits are seductive.

Central banks bought over 54 percent of the issue. I would submit that while that is great for the 2 year note it is a less than festive sign for the 5 year note and the 7 year note which will auction over the balance of this week, The money in the 2 year note is money that will not be invested in the 5 year note and the 7 year note.  The treasury should organize a posse to search for marginal dollars for the 5 year and 7 year .If one wishes to observe bond market panic I think it would develop quickly if the 5 year note or the 7 year note auctioned with long tails as we observed in the Bond auction earlier in May.

A long tail in a bond auction with its attendant risk is one thing. If that were to occur in a shorter maturity in would be a sign that investors are in full retreat from longer dated US assets.

Maybe the final climactic event is upon us. Maybe the final bubble to burst is the US Treasury market and maybe we are on the verge of a financial Krakatoa which will realign financial markets.

Whatever the case it feels like the calm before the storm and we are about to embark on another interesting expedition.

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  1. 13 Responses to “Bond Market Close May 26 2009”

  2. By jg on May 26, 2009 | Reply

    Very fine, insightful analysis/commentary, John.

  3. By BJ on May 26, 2009 | Reply

    Great points…at what point does the equity/credit market begin to price in the fact that the sell-off in UST is no longer being driven by “green shoots” but something much worse? I would have thought a follow through of last weeks rise would give pause to equities today, but maybe we need to see a 4 handle on the 10 year?

  4. By S on May 26, 2009 | Reply


    Could you comment on something that struck me as I read the release on the 2yr. it was noteworthy that the storng bid to cover came on the back of the robust primary dealer bid? this seems like a very easy metric to windowdress? oh how I lwuld like to see the ledger of indirect bids..

  5. By BL on May 26, 2009 | Reply

    Article in the FT says China has switched to shorter-term securities.

    The collapse of Fannie Mae and Freddie Mac, the US mortgage financiers, last summer prompted Safe to adjust its strategy and start buying far more short-term US government securities, instead of longer-maturity bonds and notes.


  6. By ejsmith on May 26, 2009 | Reply

    I’ve been thinking that a sloppy auction this week would provide a good entry point for equities. Short of a poor auction, I don’t see much holding stocks back for long in the near term. Price action appears very firm.

  7. By Chicken on May 26, 2009 | Reply

    How’s that Yuan carry trade looking?

  8. By daddyo on May 26, 2009 | Reply

    for what it’s worth, if you want safety, and you have concerns about inflation, you buy TIPS or you buy short treasuries.

  9. By GreenAB on May 27, 2009 | Reply

    i would add another factor contributing to the weakness in treasuries.

    Barney Frank seems to be well on track to get his MUNI BACKSTOP.

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