Prices of Treasury securities registered solid gains today. That is a bit of understatement as the gains were robust but tempered for maturities of 5 years or less while gains in the 10 year sector and the 30 year sector were spectacular.
In that regard, I will go in reverse order today, following the Biblical injunction that the last shall be first, at times. The dollar price of the 30 year bond exploded by four points and its yield declined 21 basis points to 3.69 percent. That yield is an all time low. Former President Clinton often referred to himself as the “Comeback Kid” and maybe we should apply that appellation to the Long Bond. At the auction last Thursday the issue stopped at 4.30 percent. That means that the issue has rallied 71 basis points in one week.
The yield on the 10 year has dropped 18 basis points to 3.14 percent. At the auction last Wednesday the issuance yield was 3.78 percent.
The yield on the 5 year note has declined 8 basis points to 1.94 percent.
The yield on the 3 year note dropped 10 basis points to 1.22 percent. It yields just 20 basis points more than the 2 year note. I think I mentioned this morning but on November 10 when the Treasury auctioned the issue it traded 58 basis points cheap to the 2 year note.
The 2 year spent quite a bit of the day trading below 1.00 percent and is finishing 4 basis points lower at 1.02 percent.
The 2 year/10 year spread collapsed 14 basis points to 212 basis points.
The 2 year/5 year/30 year spread is 83 basis points. It had traded in the low 90s but the smoking performance of the Long Bond worked to cheapen the 5 year note versus the wings.
Swap spreads are screaming tighter in the longer maturities. The 30 year spread is tighter by 22 basis points and is currently NEGATIVE 55. That translates into a swap rate of 3.05 percent. Ten year spreads narrowed 11 basis points to 14 ½ basis points. Five year spreads narrowed 6 basis points to 92 ½ basis points and 2 year spreads narrowed 1 ¼ basis points to 102 ¼ basis points.
This is truly a historic day and the reasons for the price action are myriad. The plunge in commodity prices has deflation fears replacing inflation fears and has led to some of the grab for yield out the curve.
The truly dysfunctional price action of the 30 year swap spread is a poster child for the fear and panic sweeping the market and is illustrative of the massive deleveraging which continues after 14 months of panic. It is my opinion that no rational investor or trader would receive swaps 55 basis points through Treasuries unless they were compelled to do so. This price action points to a massive unwind of long held positions. Market chatter has blamed the inversion on unwinds of exotic bets. That made some sense when the spread approached zero and in the immediate aftermath of that. But 55 basis points later... Something else is driving the trade.
Most dealers have year end on November 30 (though some have gone out of business) or December 31. That will force year end balance sheet management and will further reduce liquidity.
This is stream of consciousness again, and I apologize as events are occurring faster than I can put pen to paper. As I was writing this piece, stocks have collapsed and that collapse has placed stocks at an 11 year low. The S&P has cracked through the 2002 bear market lows.
JPMorgan (JPM) stock has dropped 18 percent. Morgan Stanley (MS) stock is in single digits and is down 10 percent today. Goldman (GS) stock is trading at 52 and is off 6 percent.
Corporate bonds
It was a pretty quiet day in the corporate bond market with little trading in cash securities. The IG 11 is finishing the session 264/266 after having traded in the mid 270s. As I wrote earlier, the tumult in CMBS land encouraged some traders there to use IG 11 as a hedging vehicle. As an old trading manager of mine once reminded me, the only perfect hedge is in a Japanese garden. The Verizon Wireless 10 year which priced earlier this week at T+ 5 ¼ percent has tumbled, and I have seen the issue quoted as wide as 590/570.
There were no new issues today.
Update
There have been stunning and dramatic moves in the market since wrote my earlier piece. The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today.
I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.
I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost.
Each time the spread turns more negative, that movement forces someone to receive in swaps to hedge their position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.
The 10 year note is trading at 2.997. That is an historic low yield, too.
Here is a late run for the history books. The 2 year note yields 98 basis points. The 3 year note yields 1.17 percent. The 5 year note yields 1.88 percent. I have given you the 10 year note and the bond yields 3.44 percent.
Someone told me earlier that in order to earn 10 basis points on a T bill you had to move to April.
The breakeven spread on 10 year TIPS is about zero. The market is predicting no inflation for 10 years.
Mortgages underperformed swaps by nearly 1 ½ points.
Here is a final swap run. The 2 year spread narrowed 2 basis points to 101 ¼ and the 5 year spread narrowed 4 ¼ basis points to 91 ¾. The 10 year spread narrowed 12 ¼ basis points to 13 ¼ and the 30 year spread inverted 26 ¾ basis points to 59 ¾ basis points.
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This article has 2 comments:
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SW Richmond
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388 Comments
Nov 20 04:55 PMMaybe there IS a god after all.
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dtv999
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41 Comments
Nov 21 01:43 AM