Bond Market Close June 08 2009

June 8th, 2009 4:12 pm | by John Jansen |

Prices of Treasury coupon securities one again received a bludgeoning at the hands of yield curve traders and crazed convexity types clamoring for relief from duration extension. In addition the Treasury will funnel $35 billion into the market tomorrow via issuance of a new 3 year note and another $19 billion in 10 year notes on Wednesday and $ 11 billion 30 year bonds on Thursday.

I think that the three year auction tomorrow is a gift around current levels.As  I compose this missive it is slightly behind 2 percent.  I will reiterate what I said on Friday. To believe that that Federal Reserve will soon raise rates is to smoke some potent financial ganja weed and to engage in hallucinatory behavior from the effects of said narcotic.

We are just emerging from the worst financial crisis in the last 80 years. The Chairman, who is considered an academic expert on the Depression, has said that some relapse in the banking system could derail the recovery. With the unemployment rate racing higher and jobs disappearing and initial claims at bloated levels, what reason exists for the Federal Reserve to embark on such a bold course. I just dont see it and think that the levels prevailing in the front end represent significant value against a funds rate which will remain close to zero for a very long time.

The other factor significantly influencing the market is forced liquidation of positions by traders. The curve steepening trade was universally owned and we are witnessing the effects as everyone exits at the same time. A trade can make eminent sense in a fundamental context but can put one out of business when held too long. The object of the trading game at the base level is to be able always to trade one more day. For that reason many traders are bowing to P and L considerations and jettisoning  yield curve steepening positions en masse. They want to have another shot at trading and  winning tomorrow.

The yield on the 2 year note has climbed 12 basis points to 1.41 percent.. The yield on the 3 year note has jumped 14 basis points to 1.97 percent. The yield on the 5 year note has edged higher by 9 basis points to 2.93 percent. The yield on the 10 year note jumped 6 basis points to 3.89 percent and the yield on the Long Bond is unchanged at 4.64 percent.

The 2year/10 year spread has narrowed to 248 basis points. In advance of the labor data it traded 277 basis points.

The flattening of that spread as well as the even chunkier flattening in 2year/30 year makes, in my opinion the results of the 10 year note auction and the 30 year bond auction more problematical as the unwinds make those securities less attractive. We are busy sucking the premium from the market in advance of the auctions.

My guess is that the three year note will be the anchor issue as traders sell the back end versus the auctions laterin the week.

The 2year/5year/30 year spread is now just 19 basis points.

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  1. 7 Responses to “Bond Market Close June 08 2009”

  2. By IF on Jun 9, 2009 | Reply

    John: Is the butterfly trade an approximation for the second derivative of the yield curve at 5 years? Is it connected to convexity? Questions I got after reading https://self-evident.org/?p=633

  3. By Jason on Jun 9, 2009 | Reply

    This has to be the absolute funniest comment I’ve ever read on this blog:

    “To believe that that Federal Reserve will soon raise rates is to smoke some potent financial ganja weed and to engage in hallucinatory behavior from the effects of said narcotic.”

    And it’s so funny because it’s true…

  4. By jill on Jun 9, 2009 | Reply

    “The Chairman, who is considered an academic expert on the Depression, has said that some relapse in the banking system could derail the recovery…”

    I always chuckle whej I read statements about The Cahirman’s expertise. Too bad he did not study the 1920’s credit bubble!

  5. By Gary on Jun 9, 2009 | Reply

    “The Chairman, who is considered an academic expert on the Depression…”

    Whoah!!! Who decided this guy is an expert on the Depression?

    He wrote his thesis on the Depression, so perhaps you could say he has extensively studied the Depression — but I would certainly challenge you to prove your theory that he is an “expert”.

    Lots of people have studied economics — many for longer periods of time than Bernanke. That doesn’t make them experts. Experience does not equal wisdom, never has.

    Bernanke himself has said Milton Friedman was right that the Fed essentially caused the Great Depression. Even then, Bernanke only heard half of what Friedman said: the Fed’s easy money policies of the 1920s caused the problem in the first place, and then made things worse by tightening credit at the worst time.

    The Greenspan Fed (with Helicopter Ben as copilot) ran absurdly easy money from 1997-2007, and since the credit collapse has been trying to ease credit with all sorts of semi-legal lending programs, and simultaneously tightening credit by suddenly remembering they are supposed to be banking regulators.

    Not only is Bernanke not an “expert” as you claim — I would challenge you to prove he learned anything from the Depression. He seems to be repeating every mistake, not learning from those mistakes

  6. By Jerry on Jun 17, 2009 | Reply

    “To believe that that Federal Reserve will soon raise rates is to smoke some potent financial ganja weed and to engage in hallucinatory behavior from the effects of said narcotic.”

    I agree, very funny. Every time I see them, I now picture Bernanke and Paulson with red bleary eyes, and long dreadlocks, saying……”Come now mon, every ting gwonna be alrite. Ya know, sit yowrself down and have a drag on dis mon…..it unbelievable….IRE!”

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