Bond Market Open July 31 2009

Prices of Treasury coupon securities posted modest losses in overnight trading as participants await a flood of data today with most honed in on the first peek at Q2 GDP.

The yield on the 2 year note has climbed 2 basis points to 1.18 percent. The yield on the 3 year note is a basis point higher at 1.68 percent. The yield on the 5 year note climbed a basis point to 2.64 percent. The yield on the 10 year note is a basis point higher at 3.62 percent and the yield on the Long Bond increased 2 basis points to 4.43 percent.

The 2year/10 year spread is 244 basis points.

The 10 year/30 year spread is 81 basis points.

The 2year/5 year/30 year spread is 33 basis points.

As you can observe, there was very little movement in any of those relationships .

The key piece of data today is the GDP report. The consensus expects a decline of 1.5 percent which is a sharp improvement from the 5.5 percent contraction of Q1.

There should be a healthy improvement in final sales. My friends at UBS expect final sales to have fallen at a 0.2 percent pace in Q2 after a steep decline of 3.3 percent in Q1.

UBS economists anticipate that inventories plunged $ 125 billion in Q2. That would be an annualized rate of decline of 7.6 percent and the steepest fall in inventories since record keeping began in 1947.

That mix of improving final sales and plunging inventories should set the table for positive growth in the second half of 2009. We shall see.

There is other data today. The Chicago Purchasing Managers Index should post a gain to 43 from 39.9 last month.

And the quarterly Employment Cost Index should show another modest gain of 0.3 percent. Economists at UBS expect that the wage and salary component of that index was unchanged in Q2.

There was a reasonable amount of overseas economic data overnight.

In Japan unemployment rose to a 6 year high in June at 5.4 percent versus 5.2 percent in the prior month.

Consumer prices ex food declined 1.7 percent in June.

In the UK consumer confidence was unchanged and remains at its highest level since April 2008.

European unemployment increased to 9.4 percent and is at its highest level in a decade.

Eurozone prices dropped 0.6 percent YOY in June. That is the steepest decline in 13 years.

Bond Market Close July 30 2009

Prices of Treasury coupon securities (for the most part ) posted gains today and the longer the maturity of the issue the greater were the gains.

The yield on the 2 year note increased a solitary basis point to 1.17 percent. The yield on the 3 year note was unchanged at 1.68 percent. The yield on the 5 year note declined 3 basis points to 2.64 percent. The yield on the 7 year note slipped 5 basis points to 3.25 percent. The yield on the 10 year note slumped 5 basis points to 3.62 percent. And the 30 year bond was the star of the day as its yield tumbled 9 basis  points to 4.43 percent.

The 2year/10 year spread narrowed 5 basis points to 244 basis points and it is finishing the day well inside of the 252 basis point level which chart types deemed critical.

The 10 year/30 year spread narrowed 4 basis points to 81 basis points.

The 2year/5year/30 year spread is 32 basis points.

Inflationary expectations as measured by the breakeven levels on TIPS increased today. The breakeven level on the 10 year TIPS widened 5 basis points to 190 from 185 yesterday. The breakeven spread in  the 30 year sector widened a basis point to 229 basis points.

I did hear from traders that clients were entering the flattening trade following the seven year note auction. One bond trader observed a buyer of the 30 year sector versus the 5 year sector and another volunteered that he had hear of a similar large trade in the futures pits.

I am not sure specifically what motivated the curve flattening trade today. I think some of the motivation is the technicals I alluded to in an earlier post in which chart folks are enthusiastic that the 2 year/10 spread has remainred below 249 basis points.

I think, too , that the ability of the market to absorb (albeit in sloppy fashion) as much supply as it did this week without a total debacle has encouraged some that the back end of the trading range has been established in the low 370s on the 10 year note.

Next week the Treasury will announce another batch of supply but the actual bidding will not be on us until the following week. For that crowd the 10 year note will have the opportunity to grind itself back into the 3.30s.

Tomorrow will be an important day for the markets as we will receive the first cut of numbers on Q2 GDP. That will provide some insight into the second half of the year as we observe the behavior of business and consumers.

I think the equity bulls are hoping for big liquidations of inventory so that production in Q3 and Q4 to replenish those inventories will power the recovery.

It might power the recovery in Q3 and Q4 but if the labor market remains weak and if businesses are laden with excess capacity how will the economy grow in subsequent quarters.

I run on and it is late.

Personal Trade

I was long 1000 LQD at $ 101.30. I just liquidated the position at $103.15. i bought it as an “investment’ on July 21.

i will give my corporate bond report in a moment but it seems like spreads are running too far and too fast.

And no one ever got fired for taking a profit.

Seven Year : Not an Itch But A Soothing Massage

The treasury successfully auctioned $ 28 billion 7 year notes at a yield of 3.369 percent. That was 3 basis points expensive to levels which prevailed in the market at bidding time. So, whereas yesterday there was a 5 basis point tail in which the auction yield was 5 basis points cheap to market levels and was a victory for the trading community,this auction was a victory (Pyrrhic?) for the taxpayers as the level was through the market and will save them a few shekels each year for the next 7 years.

I will digress again as I did yesterday. Why would someone bid at levels rich to those which prevailed in the market?

There are a couple of reasons. Suppose you have a huge short position and wish to cover. To cover in the market for size might be disruptive and could send a signal to the market that there is a big buyer. So, in the single price auction which I described yesterday, the trader who bids through the market might feel comfortable doing so to make certain that he gets all the bonds he needs with out causing some disruptive price action.

The problem arises because one does not know how many other folks have the same plan and if enough bidders submit bids at levels expensive to the market ,then they shoot themselves in the foot rather than maiming the taxpayer.

That would be the result today.

I used the example of someone covering a short position but the same logic applies for someone seeking to surreptitiously establish a large long.

Separately, the curve is flattening rather dramatically today. Technicians have viewed the 252 basis point level on the 2year/10 year spread as a key level. Last night that spread closed at 249 basis points and traders were waiting to see if we tested the 252 level. At the moment that spread is 244 basis points and as long as we stay below last night’s close the technical guys will be waving the flag which says it is acceptable to be in the flattener.

In the same vain the 10 year/30 year spread is now 80 basis points. I believe we began the day at 84 basis points.

Seven Year Itch

Predicting the results of the auctions is normally rather prosaic and pedestrian but this week it is a particularly perilous enterprise. The first two auctions have surprised prognosticators with weak demand and tails.

This issue , as was the 5 year note and to a lesser extent the 2 year note before it, is on the cheap side. I like to watch the 5 year/7 year/10 year butterfly and that butterfly spread is 34 basis points (using the WI 7 year note).  The first seven year note auction back in March printed about 40 basis points cheap and the range has been 40 to zero.

So there is no question that the issue is cheap. Sometimes, however, things are cheap for a reason. With the first two auctions so sloppy and each of them so far underwater that owners of each will be dialing Jaques Cousteau for aid, I do not know why dealers would bid aggressively for this one.

For that matter, why would investors bid aggressively? If you miss this one the Treasury will announce 3 year, 10 year and 30 year bonds on Wednesday. That duration laden troika of bonds should total around $ 75 billion.

Absent some miraculous deus ex machina rescue from the central banks I suspect that the sometime after the auction, we will once again visit the 3.75 percent level on the 10 year note.

Ford Price Talk

Someone just informed me that the price talk for Ford is 11 1/2 percent plus or minus 1/8.

Soft Landing for Alcoa’s CEO

alcoaWhen Alain J. P. Belda, Alcoa’s (AA) Chairman of the Board of Directors and former CEO, retires on Saturday as an executive officer, he will leave after spending 40 years with the company - certainly an anomaly by modern standards.  But he’s not exactly saying “goodbye,” and he’s going to get a very, very soft landing when he finally cleans out his desk.

In the 8-K that Alcoa filed yesterday, the company spelled out the terms for Belda’s transition.  First, he’ll continue to serve as Chairman of the Board of Directors until his term expires on April 23, 2010.  But because he will no longer be an executive, it’s doubtful that the full extent of Belda’s exit package will ever really see the light of day. Still, there are some hints in yesterday’s filing.

From the 8-K, we know that “Mr. Belda’s target incentive compensation for 2009 as an executive officer payable after year-end will be equal to 150% of his base salary, pro-rated through August 1, 2009 and adjusted by the corporate performance score determined by the Compensation and Benefits Committee of the Board of Directors at year-end.”  It’s anyone’s guess as to what that “corporate performance score” is going to be since it’s tied to a number that will be determined at the end of the year. But some digging through the company’s March, 2009 proxy told us that Belda’s 2008 base salary was $1,457,500.  Thus, that could be a bit under $1.3 million.

Starting August 1, 2009, Belda will earn an annual retainer of $192,500 for serving as a non-employee director; the company says that sum will be “prorated for length of service” but - once again - does not spell out what adjustment, if any, will be made. Belda will get another $140,000 “for his use in meeting his expenses for office space and support, for up to five years;” Alcoa will pay his universal life insurance policy premiums until Dec. 2019; and it will make a matching contribution to Belda’s tax-exempt foundation in the sum of $2.5 million, to be paid over 10 years.

In 2008, Belda earned a total comp package of more than $13.5 million, so it’s clear that he’s taking a big cut.  But it’s equally clear that he’s getting a nice, soft landing and one that will not be all that visible to Alcoa shareholders.  Then again, perhaps that’s the reward for sticking around for 40 years.

Image source: Getty Images

Corporate Bond Issuance

Ford Motor is doing a benchmark three year deal. I have not heard price talk but there is an outstanding issue, the 7.80s of 2012 which trades to a dollar price around 92. I am told that at that level it yields around 11.25.

Citibank is also raising money in the 2 year and 3 year sector. I have heard it will be a combination of fixed rate and floating rate paper.

The firm is still a basket case as this money is being issued under the TLGP program which means that you and I and our fellow taxpayers are standing behind the Citibank on this one.

Bond Market Open July 30 2009

Prices of Treasury coupon securities slumped in overnight trading as stock market gains and uncertainty regarding demand for the Treasury seven year note auction (later today)pushed prices lower.

The yield on the 2 year note increased 2 basis points to 1.18 percent. The yield on the 3 year note climbed 3 basis points to 1.71 percent. The yield on the new 5 year note is 3 basis points higherat 2.69 percent. The yield on the 7 year note surged 4 basis points (not exactly a surge) to 3.34 percent. The yield on the 10 year note climbed 3 basis points to 3.69 percent and the yield on the Long Bond increased 2 basis points to 4.53 percent.

The 2year/10 year spread is 251 basis points which is 2 basis points wider than it was when I wrote my closing post.

The 10 year/30 year spread has remained nchanged at 84 basis points.

The 2year/5year/30 year spread is opening the New York session at 33 basis points.

In spite of the excitement and light bidding interest the Treasury market is mired in a narrow but volatile range. Early in the week the 10 year note traded briefly at 3.75 percent. That level attracted buying and since then we have been swinging back and forth between 3.70 and 3.63 percent.

It will be instructive to observe todays auction and see if the apathy which has reigned the last several days continues. Given the results of the last two days I suspect the street will busy itself by shooting the taxpayer in the big toe by cheapening the 7 year note.

At the moment the vitality exhibited by the stock market is aiding that process. I think that participants will temper bid hitting until they have a chance to digest the weekly claims data. That data had fallen sharply because of some faulty seasonal factors. Today’s report should give a cleaner picture of the labor market  and will be closely studied. The consensus foresees a jump to 575K from 554K last week.

Bond Market Close July 29 2009

Prices of Treasury coupon securities took a wild ride today as a variety of cross currents buffeted the fixed income market.

Markets opened with a bid on equity market weakness in China and maintained its firm one following an ostensibly weak Durable Goods report.

As the day   progressed the focus of the market shifted to supply in the form of the Treasury auction of $ 39 billion 5 year notes. I wrote about it extensively earlier. The Readers Digest version is that the auction result was quite sloppy and the dealer community shot the taxpayers in the big toe with a 5 basis point tail.

The yield on the 2year note increased 5 basis points to 1.17 percent. The yield on the 3 year note climbed 6 basis points to 1.70 percent. The yield on the 5 year note climbed 5 basis points to 2.65 percent. The yield on the 7 year note is 3 basis points higher at 3.31 percent.The yield on the 10 year note declined 2 basis points to 3.66 percent. And they are as dogs in heat regarding the Long Bond as its yield tumbled 5 basis points to 4.50 percent.

The 2year/5 year/30 year spread is 37 basis points. That is more than 10 basis points cheaper than the close of yesterday and represents the lack of interest in the auction.

The 2year/10 year spread is 249 basis points which is 7 basis points narrower on the day.

The 10 year/30 year spread is narrower by 2 basis points at 84 basis points.

Expectations regarding future inflation declined today by a tad. The breakeven on 10 year TIPS is 185 basis  points today versus 186 basis points yesterday.

The breakeven spread on 30 year TIPS slipped to 228 basis points from 232 basis points yesterday.

Earlier in the day the Open Market Desk intervened in the free market and purchased nearly $ 3billion of securities with maturities between 2019 and 2026.

Goldman Sachs ( purportedly a well connected and well informedand powerful bond firm domiciled in lower Manhattan) put out a piece today in which the firm called for higher bond yields.

They suggest that relative to other asset classes that the risk premium built into the Treasury market is too high and should decline to reflect less risky conditions. Here is a relevant excerpt:

* UST yields have room to rise.  Financial conditions have eased
> significantly over the last month.
> * Risk premium on the UST curve is high relative to other asset
> classes.  As a result, flatteners may be attractive.
> * The strong participation in June’s front-end auctions is likely not
> the start of a new trend.

I would humbly suggest that it is possible that the Treasury market has the correct story and the other markets are wrong.

The corporate bond market remains firm and there have been no significant changes since I posted on it earlier.

Little Yield Curve Stuff

The less than enthusiastic reception for the 5 year note has prompted some shifts in the yield curve.

The 2year/5year/10 year spread (using the WI ) is now about 50 basis points. That which looked cheap is now cheaper by about 5 basis points.

The 2year/10 year spread has narrowed to 251  bbasis points from 254 basis points at the open.

The 10 year/30 year spread narrowed a basis point to 85 basis  points.


Auction Results: Less Than Festive

Tim Geithner threw a party today and he proved to be the most unpopular boy on the block as the response to his invitation was less than enthusiastic.

The 5 year note produced a yield of 2.689 percent. I often write here of the “tail’. The “tail’ in an auction is the difference between where the issue was trading in the market at the moment the bids are submitted (100PM NY time) and the level which fills the Treasury’s coffers with the offered $ 39 billion.

I am going to digress here. The Treasury holds a single price auction and bonds trade on a yield basis (WI trading,with WI bond market parlance for when issued) prior to the auction. The WI 5 year note was trading at about 2.64 percent.

The way the Treasury determines the yield can be observed by a hypothetical circumstance which I shall offer.

There were $ 39 billion 5 year notes for sale. Suppose that the Treasury received $ 38 billion of bids at the 2.64 percent level at which they were changing hands in the marketplace. They still require an additional billion to meet the $ 39 billion objective.

Now for the purposes of this discussion  let us assume that inexplicably there are no bids at any level between 2.64 and 2.689 percent. Magically, there are $ 1billon of bids at the 2.689 level and Tim Geithner can stop hyperventilating.

The process is such that the yield for everyone who bid is the yield level which clears the market. There is no “bidders curse” in which the folks who bid 2.64 would feel pretty stupid about misjudging the market so badly. Anyway, the important point is that this market clearing level is the level at which all who bid will own securities.

Back to the tail. The tail is an indicator of relative interest in the auctions and the 5 basis point tail on the 5 year note today was rather large. Unfortunately, I have no facility here to check history but I just spoke with a fellow who trades the belly and he suggests that it has been more than year since one has tailed that much.

And it is also troubling that it happened in concert with the sloppy 2 year note auction yesterday. Several participants have reported that the 2 basis point tail yesterday was the first tail on the 2 year note since December.

And if the Treasury had concocted a plan to obfuscate the meaning of the indirect bidding category to make it appear that there is more central bank interest than there really is, then that enterprise has been an abject failure as the indirect bidding interest has been parsimonious yesterday as well as today.

Tomorrow the Treasury will sell $ 28 billion 7 year notes into a thin market. It appears that the market is undergoing some recovery as I write but with the poor results of today and yesterday it is difficult to see anyone taking a brave stand tomorrow with out an appropriate concession.

Five Year Note Auction

At 100PM (about 2 hours and 20 minutes from this moment) the US Treasury will regurgitate $ 39 billion 5 year notes into the waiting arms of investors and dealers.

The issue looks cheap on the yield curve. Bill O’Donnell of RBS Securities in his morning missive noted that the 2year/5year/10 year spread was 21 basis points as recently as July 13. As we speak that spread (using the WI issue) is about 45 basis    points.

Similarly, on July 22 the 5 year note was 15 basis points rich to Europe. Today the issue now trades 10 basis points cheap to Europe for a swing of 25 basis points.

I think the auction will go well because of the relative value considerations. However, I believe that the market has limited upside because the Treasury will return tomorrow with $ 28 billion 7 year notes. Unless equity markets hit an airpocket there is not much reason for debt markets to do appreciably better until the 7 year note is out of the way.

The level of activity is light today and central bankers seem to be on the sidelines.

Morning Misses

Several points which I failed to note in my opening post:

The Chinese stock market took a 5 percent tumble overnight as two large lenders have acted to restrict the availability of credit.

The Federal Reserve will release its Beige Book today.

The Open Market Desk will conduct a buyback in the 2019 through 2026 sector.

Bond Market Open July 29 2009

Prices of Treasury coupon securities have posted modest gains (mostly) in overseas trading. The yield on the 2 year note is unchanged at 1.12 percent. (We are using the new 2 year note and the roll is about 4 basis points.) The yield on the  3 year note edged lower by a basis point. The yield on the 5 year note slipped 2 basis points to 2.58 percent. The yield on the 7 year note declined 2 basis points to 3.26 percent. The yield on the 10 year note dropped 3 basis points to 3.66 percent. The yield on the 30 year bond fell 3 basis points to 4.52 percent.

The 2 year/10 year spread is 254 basis points this morning. Roll adjusted that is 3 basis points narrower.

The 10 year/30 year spread is 86 basis points which is 2 basis points narrower.

The high point of the day will be the offering of $ 39 billion 5 year notes to global investors by young and clean shaven Timothy Geithner and his minions. We shall see if demand emerges for that issue. My guess is that there will be demand for the issue and that one should not extrapolate the result of the 2 year note auction yesterday as meaning a poor result today.

At 830AM New York time (is there any other time?) the Treasury will release the June Durables Goods report. The measure gained 1.4 percent in April and 1.8 percent in May. The consensus foresees a decline of 0.6 percent this time.

Economists at UBS see a decline of 2.0 percent. Those economists note that a decline of that magnitude would result in a gain for the quarter of 3.2 percent annualized. Not much improvement but pretty robust when assayed against the 38.8 percent decline in Q1 and the nearly 46 percent decline of Q4 2008

Bond Market Close 07/28 /09

Prices of Treasury coupon securities posted a truly bifurcated result today with yields on the shorter maturity benchmark issues rising while longer dated issued posted gains.

The yield on the 2 year note climbed 4 basis  points to 1.08 percent. The yield on the 3 year note increased 5 basis points to 1.65 percent. The yield on the 5 year note increased one basis point to 2.60 percent. The yield on the 7 year note posted a 2 basis point decline to 3.28 percent. The yield on the 10 year note slipped 3 basis points to 3.69 percent. The Long Bond was the superstar of the list as its yield tumbled 6 basis points to 4.57 percent.

The 2 year/10 year spread narrowed 7 basis points to 261 basis points.

The 10year 30 year spread compressed 3 basis points to 88 basis points.

The 2year/5year/30 year butterfly cheapened to 45 basis points.

The breakeven spread on 10 year TIPS narrowed 6 basis points to 186 .

The 30 year breakeven spread is 232 basis points.

The Treasury conducted an auction of $ 42 billion 2 year notes today and the response as viewed through the prism of auction results was less than festive. There was a tail of 2 basis points. (In bond market jargon the tail at an auction is the spread between the level at which the issue was trading in the market immediately prior to the bidding deadline and the level which ultimately cleared the market.)

One trader observed that this was the biggest tail on a 2year note auction since last December. I will trust him on that front.

I do think that there is a market related reason for the tail. I think that many investors did not wish to miss the auction and preferred not to be aggravated by the bidding process.

Consequently, there was significant buying of the WI issue yesterday and today in advance of the auction. I think that took the short base out of the market.

If there truly had been a debacle here and if dealers and investors had bought many more bonds than they needed,then the long end would not have traded as well as it did following the auction. if dealers were long they would have played defense by tatooing the 5 year note and 7year note which are scheduled for tomorrow and Thursday.

Economic data which printed today was mixed. The Case Shiller housing data indicates more stability in the housing market.

On the other hand the Conference Board confidence number declined for the second month in a row and showed a consumer deeply concerned about the state of the labor market.

San Francisco Fed President Yellen spoke today but did not break any new ground. She noted that the recovery would be slow but when the time arrives to tighten she said that the Fed would do the right thing and would not repeat the policy mistakes of the Arthur Burns and William Miller regimes.

I hope she is right. Actually, I hope that she is wrong ass traffic to the blog is highly dependent on market volatility. A strong whiff of inflation wafting through the economic precincts would be good for traffic!!

Agency Market

Agency spreads are 2 basis points to 3 basis points tighter across the curve today. One seasoned trader ( and friend of the blog) noted that the street still feels short from the Open Market Desk purchase Friday in the 2 year through 4 year sector.

The trader noted that in the past the street would run the market up in front of the Fed purchases and then those who failed to make sales would pressure the market afterwards as they sought to unload unpurchased inventory.

That is not the case this time as the market is still well bid.

There has been active buying by end users in the 2 year through 3 year sector and by money funds in the less than one year arena.

Two Year Auction

In about an hour the treasury will sell $ 42 billion 2 year notes. Central banks have been chunky buyers of the issue the last two days and the forward roll has narrowed from nearly 5 basis points to 4 1/4 basis points as a result.

If you believe Bernanke that financing will remain at zero for an extended period,then these are a steal as there is a ton of carry and roll down.

I am told that the issue at 60 basis points is on the cheap side versus the year bill and it is on the cheap side versus 3 year notes.

I also believe that the street will use this as an anchor issue versus the 5 year note and the 7 year note.

This one should go real well.