Bond Expert: Friday Wrap
Prices of treasury coupon securities posted modest declines today in spite of an employment report which defined and described a very anemic economy. After the release of the data the 2 year note traded to a yield of 2.10 percent. That yield level and similarly low yields in 5 year notes brought sellers to the fray. There was chunky selling of the old 10 year series as well as the 2 year and the old 2 year.There was also chunky paying in swaps by rate lockers as well as by investors who were prescient enough to catch this recent lightning brigade charge to lower rates. Some investors anticipate sovereign and supra issuance next week at the 3 year point and that probably accounts for some of the rate locking in that sector.
The action in the equity market also skimmed a bit of the frothiness from bond prices. Early in the day equities had cratered by as much as 150 Dow points but they have recovered and the last time I checked were posting small gains.
The yield on the benchmark 2 year note has climbed 5 basis points to 2.2 percent. The yield on the benchmark 5 year note also climbed 5 basis points to 2.90 percent. The yield on the 10 year note edged up 2 basis points to 3.64 percent and the yield on the Long Bond increased one basis point to 4.27 percent.
The 2year/10 year spread narrowed 3 basis points to 142 basis points.
The 2year/5 year/30 year butterfly cheapened 4 basis points to 69.
The very weak labor report highlights the weakness in the economy and the transformation of the economy which has transpired the last several months. When the FOMC meets in a week and a half they will confront a markedly different economic landscape.
The last several weeks have brought a stunning reversal to the commodity markets and to energy products, in particular. For an FOMC obsessing about inflation , there must be some solace in the depths of those price declines as it provides them a little wiggle room.
In the last several weeks the dollar has accomplished an amazing turnaround. Bernanke had mentioned the inflation threats posed by the weak dollar so that the turnaround in the FX market is another success for policy makers.
Global growth has slowed as the economies of some of our main trading partners have dropped to zero or outright contraction. The strength in Q2 GDP was all exports and it is hard to think that level of success can be duplicated in Q3.
Q2 was the rebate quarter but that source of stimulus has long ago faded. With consumer confidence at multi year lows and the labor market deteriorating, consumption should be a drag on growth.
And with all of that, housing prices are still falling and the financial headwinds are strong.
I believe that in these circumstances the FOMC will shift its focus to growth and they will note that the risks to growth exceed the risks of inflation. I recall that there was an air of hawkishness about the last FOMC statement and I believe the Committee will work assiduously to remove that sentiment.
Mortgage spreads reversed early gains and are 4 ticks wider to Treasuries.
Yesterday in the comments section of some post a reader enquired about CMBS spreads. One trader of that product noted the recent tightening of that product (20 to 30 basis points in AAA) and said that paper had been unfairly infected by the problems of Fannie and Freddie several weeks ago. The paper became so cheap that there was significant end user buying which drove spreads tighter.
Agencies
Agency spreads are a little wider today. Spreads are 2 basis points wider in the 2 year sector and about ½ basis point wider in the 5 year and 10 year sector. The 2 year sectors underperformance relates to the expected announcement of a $3billion 2 year note on Monday.
One trader with whom I conversed noted that there has been a pickup in end user purchases of callable paper with 2 year through 3 year finals and 6 month to 1 year lock outs.
Separately, there has been much discussion of a Freddie Mac (FRE) 8K filing which changed portions of their corporate charter. In its original state, the articles of incorporation of Freddie denied voting rights to holders of more than 20 percent of Freddie’s shares.
The change is necessary as the negligible market capitalization of Freddie is such that any large purchaser would likely own more than 20 percent of Freddie shares. It is unlikely that a large holder would make such an investment without being handed the power concomitant with such an investment.
Corporate bonds
The corporate bond market remains comatose. The information which I post here on that market comes from two friends who have been hawking corporates for quite a few years. They consistently report that the secondary cash market is dormant, closed and shuttered. I talked today with a former client who runs a modest sum of money in the corporate sector for a large fund. He reported that most of what I report here is his experience, too. The market is very illiquid and there have been recent times when he has called six and seven dealers and is unable to find a bid on reasonably small blocks of bonds.
One of the reasons for the paralysis of the secondary market is the cheap pricing in the primary market. He noted that he had recently bought $5million of a utility bond and two days later the company sold $250 million of new paper which caused his secondary piece to cheapen 30 basis points.
So until the new issue market prices tighter it will be difficult to turn around the secondary market.
The IG 10 is closing around 149 basis points.
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This article has 2 comments:
- Whidbey
- 770 Comments
Sep 05 06:12 PMOh yes, good news, the Fed and Treasury are meeting today to fix the market's GSE insecurity by making some sort of statement in clarification of what the treasury might do. It should be helpful, not.
- buyitcheap
- 422 Comments
Sep 05 10:26 PM