Bond Expert: Wednesday Wrap

by: John Jansen December 03, 2008 | about stocks: CAT / HPQ    

John Jansen

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Prices of Treasury coupon securities, on balance, registered very modest gains today in featureless trading. The yield on the 2 year note slipped one basis point to 0.88 percent. The yield on the 3 year note fell 3 basis points to 1.06 percent. The yield on the 5 year note fell 3 basis points to 1.60 percent. The yield on the 10 year note dropped one basis point to 2.67 percent and the yield on the Long Bond is unchanged at 3.14 percent.The 2 year/10 year spread is unchanged at 179 basis points.

The 2 year/5 year/30 year spread is 85 basis points.

I do not have a good story today. I thought that Treasury yields would trend a little higher today after the recent prodigious gains. They still have a bid and buyers emerge on dips. Maybe this is one of those weeks when we observe the lowest yields immediately ahead of the employment data.

Swap spreads

Two year swap spreads are 4 basis points wider at 110 basis points. Five year spreads are 6 basis points wider at 94 basis points. Ten year spreads are 5 basis points wider at 28 basis points. Thirty year spreads normalized 5 basis points to NEGATIVE 32 ½ basis points. I guess that there are several reasons for the spread widening. Mortgages have been erratic of late and if you have been in the wrong coupon they are lagging quite a bit. So, some of the paying is versus mortgages.

There has also been a story floating about that sometime early next year Treasury repo would begin to trade at negative repo rates. No one is sure how or when such a proposal would be implemented but one swap trader told me that the topic is widely discussed and has to a degree infiltrated the market.

Agency debt

Dealers expect that the Federal Reserve will notify them tomorrow that the Federal Reserve will purchase agency paper on Friday. The process will be conducted through the primary dealer network about once a week. The Federal Reserve will purchase fixed rate non callable senior debt. Spreads today were mixed. Two year spreads narrowed 2 basis points while 5 year and 10 year spreads were about 5 basis points wider. One trader with whom I speak felt that the underperformance of the 5 year sector and 10 year sector was a result of profit taking following the recent spread improvement.

The trader with whom I spoke mentioned one glaring anomaly in the agency market. On the run benchmarks trade at huge premiums to off the run issues. As an example the 3 year FNMA trades at T+130 while an issue three months shorter trades at T+160.

Dealers are long off the run paper and short the on the run and this results in a never ending bid for the on the run issue.

Corporate bonds

The corporate bond market was something of a quiet backwater today. There was no meaningful issuance except in the FDIC guaranteed sector where Wells announced a $6billion deal.Yesterday was a heavy issuance day with Hewlett Packard (HPQ) and Caterpillar (CAT) offering benchmark size deals. The Hewlett Packard 5 year priced at T+ 460 and is currently 440 bid.

Caterpillar priced a 10 year at T+ 525 and this issue is bid there at the moment. The 30 year CAT priced at 510 and is 485 bid. For the record, the 10 year deal was $900million and the 30 year deal was just $250million.

I still love to watch the AMEX 5 year which is 675/655.

The 10 year GE is 395/375.

The IG 11 is 263/265.

FDIC run

FDIC debt, markets: at 4:00pm

gs 3.25 6/12 193/188
ms 2.9 12/10 177/171
ms 3.25 12/11 194/189
jp 3.125 12/11 194/189
bac 3.125 6/12 198/194
c 2.875 12/11 194/191

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This article has 3 comments:

  •  
    Dec 03 06:29 PM
    Isn`t this the shorting opportunity of a lifetime? (10Y and 30Y bonds)
    Reply | Link to Comment
  •  
    Dec 03 06:33 PM
    I am certainly interested in bonds--Treasuries and corporates. And, I do learn something everytime I read your pieces. However, your shorthand and jargon are losing me.

    Perhaps you'r writing for the bond experts. If so ignore this comment.

    If you'd like to reach those of us who are somewhere between bond dummy and bond expert, you might try the Wall St. Journal's approach to defining terms and explaining jargon.

    Just a thought
    Reply | Link to Comment
  •  
    Dec 04 08:41 AM
    John Jansen's articles on the bond market are the best resource to get the news on and understand of the bond market. The business media is so focused on the Stock Market (as usual), that it is missing the big picture regarding this financial crisis, the credit markets.

    Thanks for the great work John!
    Reply | Link to Comment
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