Closing Comments June 04 2008

June 4th, 2008 3:11 pm | by John Jansen |

Prices of Treasury coupon securities took a rather healthy tumble today as several multifaceted cross currents buffeted the markets. I will attempt to distill the price action into a very brief explanation. Traders were long following the credit fears about Lehman Brothers. We were at the top end of a trading range following a robust rally. Economic numbers disappoint the assembled throng and then every one looks to exit at the same time. Ergo, lower prices ensue.The yield on the benchmark 2 year note climbed 6 basis points to 2.46 percent. The yield on the benchmark 5 year note rose 8 basis points to 3.27 percent. The yield on the benchmark 10 year note climbed 9 basis points to 3.98 percent and the yield on the Long Bond also climbed 9 basis points to 4.71 percent.
The 2year /10 year spread had widened to 152 basis points. The 2year/5year/30 year butterfly is at 63 basis points.

There was huge buying of the 5 year early in the day by an end user and central banks have been selling 2 year notes when they approach 2.40 percent.

I want to return to the Bernanke speech which has received much attention because he spoke about “significant” inflation. I think the Bloomberg headliner writer is short financial assets of every ilk as the speech was mostly upbeat. I think the reaction to the speech is about positions. If traders truly believed that the Fed was hyperventilating about inflation, then the 2 year note should have been sold hard. Instead it is the best performer on the list. That indicates to me that the street is long the longer maturities and the price action forced out many players. If the street truly believed that the Fed was about to respond to some inflation pressures ,then the curve should have flattened as investors would shun the 2 year sector.

This is a blog so I am allowed to do real time reporting. I just spoke with one of my MBS sources and he reports that when the FNMA 5 ½ breached the 99-16 level it brought it waves of selling and paying versus swaps. Servicers are the culprit as they sold MBS and paid for size in swaps. Mortgages have lagged swaps by about a basis point and have underperformed Treasury benchmarks by 4 basis points to 5 basis points.

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  1. One Response to “Closing Comments June 04 2008”

  2. By S on Jun 4, 2008 | Reply

    the curve is telling you it is deflation. All the talk about the 70s is talk a distravction, useful one, to the 30s nightmares he is having at nihgt. Bernanke is probably wishing he had the 70s, but his problems are much greater.

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