Bond Expert: Friday Wrap
Treasuries
Prices of Treasury coupon securities are finishing the day with modest gains, but in most market sectors, prices have retreated from the outsized gains post early this morning when misguided analysts prophesied the end of the Western world as we know it. Your amiable author was one of those false prophets.The yield on the benchmark 2 year note is 3 basis points lower on the day and yields 2.11 percent. Early this morning it traded at 2.10 percent.
The yield on the benchmark 5 year note has slipped 4 basis points lower on the day to 3.05 percent.
The yield on the 10 year note has declined 2 basis points to 3.84 percent. In early trading this morning it traded at 3.79 percent.
The Long Bond is finishing the day at 4.36 percent. The yield on this issue actually declined over the course of the day and in early trading the Bond yielded 4.37 percent.
The 2 year /10 year spread is now 173 basis points. It has narrowed by 10 basis points from levels which prevailed this morning.
Agencies, with a side of MBS and Swaps
Agency spreads are tighter by 1 basis point to 2 basis points in the 2 year sector. Five year sector paper is about unchanged and 10 year paper is about 4 basis points wider.There has been a sharp tiering in the agency market with FNMA and Freddie Mac paper significantly outperforming Home Loan paper. Here are several examples. In the discount note market Home Loan issued March 16 paper today at around a 3.34 percent discount. FNMA paper in that sector traded around 2.80.
In the 2 year sector the benchmark 2 year FNMA trades on the bid side about 97 basis points over the Treasury issue while the comparable Home Loan issue trades around 133 over the 2 year.
There are similar anomalies in the 5 year and 10 year sectors but the differences are not quite as wide.
The Home Loan has been a heavy issuer of discount notes to fund advances to WaMu (WM) and others. That has caused some degree of angst and has pressured the full panoply of Home Loan paper across the curve (which would be a great name for a blog.)
The JPMorgan purchase of WaMu should alleviate some of that pressure as the ceaseless issuance by Home Loan should decrease. I suspect that JPMorgan will be able to fund itself at better levels and will probably pay off some advances that funded Home Loan assets. Over time that will work to tighten the spread relationships back to something more normal.
Separately, FNMA 5 1/2s are about 7 wider to swaps today.
Swaps are tighter by 5 basis points in the 2 year sector, 1½ basis points in the 5 year sector and 3½ basis points in the 10 year sector.
Corporate (from 3:20PM)
Corporate bond market participants are beleaguered and weary after a difficult week which culminated in the demise of WaMu. With WaMu interred, the pack of jackals set out after Morgan Stanley and Wachovia. Wachovia stock has dropped 33 percent and CDS trade at a prohibitive cost with protection quoted 32/36 points upfront.
Morgan Stanley stock is down about 7 percent after being down about 15 percent this morning. I had Bloomberg radio on in the Across the Curve limo and heard that John Mack had issued a soothing email to employees.
CDS on this name is quoted 15/19 points up front.
Goldman Sachs CDS trades around 455 and Citibank trades around 330ish.
The world perceives JPMorgan as the best in its class and it trades 150/165. Wells Fargo would change hands around 155/170 and B of A trades 160/180.
Issuance has been light and troublesome as it requires significant yield concessions to fund preeminent industrial names as well as stable utility issuers. With quarter end looming and the credit markets frazzled, fragile and fearful, it is quite unlikely that there will be significant issuance unless there is a dramatic change on the environment.
Do not hold your breath for that.
Overall, the focus of the market was the rescue package and the histrionics which surround it. There is still a standoff between the House Republicans and most of the rest of the world.
I suspect that means another Sunday evening at the keyboard.
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