MBS and Vol

In the early going mortgages are unchanged versus swaps. There is a strong bid for lower coupons in anticipation of a large month end index extension trade.

Some one just priced the three month /ten year ATM swaption straddle at 621 1/2 .


Swap Spreads

Swap spreads are mixed. Some are flat and some a tad wider but with the Treasury market in the throes of a debacle that is not the case in the swap market…….yet.

Two year spreads are flat at 44   1/2. Five year spreads are flat at 45 1/2. Ten year spreads are a basis point wider at 24 and thirty year spreads are a basis point wider at NEGATIVE 19 1/2.


Bond Market Open July 27 2009

Prices of Treasury coupon securities are suffering the slings and arrows of outrageous fortune as well as a malaise contracted from the belief that staus quo ante is in the process of returning to the global economy and global financial markets. Today also begins a period of record issuance by the US Treasury and the confluence of those factors has driven bond yields higher in overnight trading.

The yield on the 2 year note has climbed 3 basis points to 1.03 percent. The yield on the 3 year note has climbed 5 basis points to 1.60 percent. The yield on the 5 year note has also climbed 5 basis points and rests at 2.58 percent. The yield on the 7 year note has jumped 6 basis points and begins the New York trading day at 3.28 percent.The yields on the 10 year note and the yield on the Long Bond have each risen 4 basis points to 3.70 and 4.58, respectively.

The 2year/10 year spread has widened a tad to 267 basis points.

The 10 year/30 year spread is unchanged at 88 basis points.

And in an indication that supply is taking a harsh toll on the belly of the yield curve, the 2year/5 year/30 year butterfly has narrowed to 45 basis points.

Equity markets around the globe are ebullient, enthusiastic and energized and in thrall to the notion that all is well and if it is not well it will be soon. Bloomberg carried a story that the Japanese stock market had risen for a ninth consecutive day. That is the longest such winning streak since 1988.

I also observed a story that the stock market in China has doubled from its low. (When I was younger and with much more hair than I had now I owned a copy of Quotations from Chairman Mao. I do not recall him commenting on the stock market in that little red book.)

Pre market trading indicates that the US equity market will open with modest gains, too.

I was speaking with a former customer last week who offered the proposition that the equity market rally (globally ) is a massive short squeeze. The squeeze springs from a massive outright short in equities as well as shorts versus other sectors of the capital markets. The rally will prove unsustainable as investors realize that global economic recovery will be quite slow and there will not be a V but a W.

The supply tsunami of which I have written begins today with bill auctions and the reopening of 20 year TIPS. The TIPS auction will total just $ 6 billion and for that small size should go well. I do not follow the spread on 20 year TIPS but do follow the 10 year breakeven spread. That spread is currently close to 190 basis points and on the expensive side of its recent range.


Bond Market Close 07/24/09

Prices of Treasury coupon securities were not quite dramatically unchanged but a huge wave of ennui engulfed the market and trading activity today was quite minimal. It was a very volatile week in the various market segments and from the earliest moments of the day participants favored inaction over action.

Action will pick up next week as the Treasury returns to market after a fortnight hiatus. I think that next week will be about underwriting concessions and shooting the taxpayers in the big toe. Dealers will accomplish that task by lending a merdurinous tone to the belly of the yield curve.

The 2year/5 year/30 year spread is currently 49 basis points which is where it closed yesterday and opened this morning.(That factoid in and of itself should tell you about the lack of activity.) The Treasury is auctioning $42 billion 2 year notes, $ 39 billion 5 year notes and $ 28 billion 7 year notes. The duration in the 5 year and 7 year buckets swamps the duration in the 2 year bucket.

There might be a hiccup to swallow the 2 year on Tuesday but I think that will quickly reverse as traders face the 5 year and 7 year supply. I suggest buying the 2 year versus the 5 year and 7 year. If you do not want the steepening trade play defense by adding the 30 year. I think that the 2 year/5 year/30 year butterfly will be 10 basis points to 20 basis points cheaper by the time the auction process runs its course.

The 2year 10 year spread is 2 basis points wider at 266 basis points.

The 10 year/30 year spread is 89 basis points.

The yield on the 2 year note dipped a basis point to 1.00 percent. The yield on the 3 year note slipped 2 basis points to 1.56 percent. The yield on the 5 year note is unchanged at 2.53 percent and the yield on the 7 year note is stationary at 3.23 percent. The yield on the 10 year note edged higher by a basis point to 3.66 percent. The yield on the 30 year bond dropped a basis point to 4.55 percent.


Corporate Open

Bank and financial paper is opening 5 basis points to 10 basis points tighter. The new Bank America deal which priced at 330 versus 7 year Treasury is 328/323. It had traded as tight as 321 yesterday.

Each of the Boeing tranches is better bid also. The 5year priced at 110 and is 108 bid. The 10 year priced at 130 and is 127 bid. The 30 year priced at 145 and is 143 bid.


Bond Market Open July 24 2009

Prices of Treasury coupon securities are registering small losses in overnight trading. The yield on the 2 year note increased 2 basis points to 1.03 percent. The yield on the 3 year note increased 1 basis point to 1.59 percent. The yield on the 5 year note climbed 2 basis points to 2.55 percent. The yield on the 7 year note also increased 2 basis points to the magical and mystical 3.25 percent level.The yield on the 10 year note climbed 2 basis points to 3.67 percent and the yield on the Long Bond edged one basis point higher to 4.56 percent.

The 2 year/10 year spread is 264 basis points.

The 10 year/30 year spread is 89 basis points.

The 2year/5 year/30 year spread is unchanged at 49 basis points.

There is one piece of economic data on the docket today and that is the final University of Michigan Confidence survey. The preliminary report registered a 6.2 point decline to 64.6. The consensus calls for the final report for July to register at 65. Higher equity prices and lower gas prices probably led the gains.

In overseas economic news the UK economy contracted more than forecast in Q2. GDP contracted 0.8 percent from Q1 and fell 5.6 percent YOY. The YOY decline was the largest since record keeping began in 1955. (What were the British doing all those years? Why cant we say that it was the largest drop in GDP since Disraeli or Gladstone held the office. I am disappointed!)

On the continent the German IFO increased more than expected to 87.3 versus 85.9 in the prior period.

And a composite index of European manufacturing and services rose to 46.8 from 44.7

I have a feeling that this will be one of those summer Fridays on which the great mass of the unwashed will pack up early and leave for a weekend of fun and frolic in the sun.

Yesterday was a very bad day for Treasuries with yields rising sharply. Next week investors brace for record levels of supply from young Timothy Geithner and his minions.

The price action between the markets yesterday is a cause for concern as the underwriting process unfolds into next week. My concern is that the fixed income debacle yesterday was primarily a Treasury market event. The corporate bond market and the MBS market performed well on spread. Swap spreads widened somewhat but there was not a throw out the baby with the mentality.

Stocks reached multi month highs and money flowed copiously to risky emerging market countries.

If the appetite for risk does not fade,then woe to the Treasury market next week as the supply wave hits the shore.

Separately, the Open Market Desk will intervene in the free market today and purchase agency debt which matures between August 2011 and July 2013.


Bond Market Close July 23 2009

Prices of Treasury coupon securities tumbled hard today as an exodus from Treasury paper into riskier assets weighed on sentiment. An ebullient stock market exercised similar power as did the heavy supply which the street will confront next week.

The yield on the 2 year note crossed above 1 percent again as it increased 10 basis points to 1.03 percent.The yield on the 3 year note climbed 12 basis points to 1.60 percent. The 5 year was the underachiever of that day as its yield soared  17 basis points to 2.56 percent. The yield on the 7 year note did not perform better as it jumped 16 basis points to 3.69 percent. The yield on the 10 year note climbed 15 basis points to 3.69 percent. The yield on the 30 year bond increased 13 basis points to 4.58 percent.

The 2year/10 year spread increased 5 basis point to 266 basis points.

The 10 year /30 year spread narrowed a tad to 89 basis points.

Reflecting its status as the day’s worst performer the 5 year note underperformed the wings of the butterfly by about 12 basis points as it closed at 49 basis points.

The coupon supply announcement brought forward rolls in the Treasury market. The two year roll trades at 5 3/4 basis points. The 5 year roll trades around 4 basis points and the 7 year roll trades at 3 1/2 basis points.

Have a great evening.


MBS and VOL and Swaps

Mortgages are about 2/32 tighter to swaps. There has been some origination based supply as well as some convexity based selling.

That supply has been countered with buying from an eclectic group of investors. Some believe that the supply based selling is over and further believe that theTreasury market will hold current levels. That is a rather tenuous assumption at the present but if you have faith in that proposition then these probably are decent levels to buy.

One salesman also mentioned that MBS had reached dollar price levels at which Asian investors have interest and he expected some buying from that quarter this evening.

The three month/ten year ATM swaption straddle continues to sell off and is last at 613 basis points. Earlier today I marked them at 619 and it is closed yesterday at 625.

Swaps are generally wider today.Two year spreads are a basis point wider at 44 1/2. Five year spreads are flat at 46. Ten year spreads are 3 basis points wider at 23 and thirty year spreads are 4 basis points wider at NEGATIVE 20 1/2.


Supply Tsunami

The Treasury will auction something in the neighborhood of $ 236 billion in securities next week.

Let me breakdown the component parts.

I will begin with the one piece of the puzzle which is not yet set in stone. prognosticators expect that on Monday the Treasury will announce an auction of $ 31 billion 4 week bills.

Everything else I note here has been announced already publicly.

There will be $ 6billion in a reopening of a 20 year TIPS bond.

There will be $ 42 billion 2 year notes.

There will be $ 39 billion 5 year notes.

There will be $ 28 billion 7 yearnotes.

There will be $ 27 billion one year bills.

There will be $ 63 billion on three month bills and six month bills.

If Sister Mary Consolata taught me well,that is $ 236 billion.

To be fair it oversates the case somewhat. Much of it is in short dated T bills where there is not much risk. And much of it rolls over maturing paper.

However,in terms of sheer size and magnitude it places the financing needs of the US government in stark relief.


Volatility

The  three month/ten year ATM swaption straddle which I chronicle here regularly is softer today. It trades around 619 basis points and it closed in the mid 620s.

i had thought with the debacle in the market that vol would be higher but I am picking up that it is unchanged in longer expirys and is a tad softer in the three month and shorter stuff.

Any thoughts?


Buyback

The Federal Reserve bought $3 billion Treasuries in the long end of the curve. Check this link to the New York Fed for a breakdown.


More on the Treasury Market

I have also picked up rumours of a large seller of the 5 year and 10 year sector this morning. Rumour mongerers allege the seller was from the Middle East.

Separately, I reported yesterday that Asian central banks were prospective buyers around 3 5/8 percent on 10 year notes.I am told that over the last fifteen minutes that buying has emerged in reasonable size.

Over and out!!!


On the Treasury Market Drubbing

The Treasury market has turned rather ugly. The belly of the curve has taken a drubbing and the yield curve is steeper.

The 2year/10 year spread is now 263 basis points versus 259 basis points at the open.

The 10 year/30 year spread is 2 basis points narrower at 88 basis points. TheOpen Market Desk buyback supports the longer maturities.

The belly of the curve has been treated with disrespect. The 2year/5 year/30 year spread has moved 8 basis points to 51 basis points from 59 basis points at the open.

Market participants have cited the increased appetite for risk as a cause of the debacle. The ebullient,enthusiastic and energized equity market is sapping interest in risk free Treasuries.

Corporate bonds are still seeing strong demand. One salesman noted the three pronged benchmark size offering from member of the military industrial complex,Boeing. The company is offering 5 year,10 year and 30 year bonds. The initial talk (chronologically) was T+ 130,150 and 175. Interest was so strong that the latest talk is T+ 115,135 and 150.

Bank America is offering a benchmark seven year note. The whispered talk is T+3 3/8. That looks to be 30 basis points or so cheap to outstanding paper.

Separately, another trader cited the woes of the yen as a manifestation of the shifting appetite for risk. This trader has observed at his firm hedge funds and other fast money types selling yen in favor of brazilian reals,Turkish lira and Aussie dollar.

The markets are thin and liquidity is poor. If for some reason stocks were to suddenly crater and head back to unchanged,I suspect that these prices would engender some buying.


Swaps and MBS

Swap spreads are opening a tad tighter this morning. Two year spreads are 3/4 basis points tighter at 42 1/2. Five year spreads are 1 basis point tighter at 45. Ten year spreads are a basis point tighter also at 19 1/4. Thirty year spreads are 1/2 basis point tighter at NEGATIVE 24 3/4.

Mortgage are in line with swaps in very light trading. Origination volume has been minimal but so has the buying from the usual suspects.


Full Disclosure

In the interest of full disclosure I want to reiterate that I am long 1000 shares of LQD which I purchased some time on Tuesday ( during the Bernanke testimony).

I write several times each day about the corporate bond market and I wanted to make sure that my position remains known.

I will not mention my position again today unless it is too report that I have liquidated ( which I view as most unlikely).


Corporate Bond Cash Market Quotes

Financial sector paper is opening unchanged to a nickel tighter this morning.

Here are some non randomly chosen names which are tighter this AM:

C 8 1/8 2039 382/77 versus 387/382 yesterday morning

JPM 4.65 2014 155/145 versus 160/150 yesterday morning

Morgan Stanley 7.3 2019 240/230 versus 250 240 yesterday morning


Slow, Very Slow

To demonstrate the point of how quiet the markets are I note that the analysts at RBS in their morning letter noted that Treasury market volume last night (measured from Tokyo open to 600AM New York time ) was just 55 percent of the 10 day average.


IG12 and Some CDS

- 5yr Snr Bank CDS: BAC 150/160 (unch), CITI 335/345 (unch), JPM 70/75 (unch), WFC 105/115 (-3)

- 5yr Snr Broker CDS: GS 120/130 (-3), MS 170/180 (unch)

- CDS Index: IG12 122.5/123.5 (+1)


Bond Market Open July 23 2009

Prices of Treasury coupon securities  have registered virtually no change in overnight trading. The yield on the 2 year note has edged higher by a basis point to 0.95 percent. The other benchmark issues are virtually unchanged. The yield on the 3 year note is 1.48 percent. The yield on the 5 year note is 2.40 percent. The yield on the 7 year note is 3.10 percent. The 10 year note yields 3.54 percent and the 30 year bond yields 4.44 percent.

The 2year/10 year spread is 259 basis points.

The 10 year/30 year spread is 90 basis points.

The 2year/5year/30 year spread is 59 basis points.

The Treasury will announce the package of bonds that it will auction next week. it will consist of 20 year TIPS and then 2 year notes,5 year notes and 7 year notes. The entire package should be approximately $ 110 billion.

The economic highlight of the day will be the initial claims data. I posted a piece late night from UBS which explains how faulty seasonal factors the last several weeks tarnished the number. There should be a big jump in claims this week as the faulty seasonal factor corrects itself.

The Open Market Desk will intervene in the once free market and purchase bonds with maturities from August 2026 through May 2039.

I watched  small pieces of the Presidential news conference last night. I have very little expertise in the area of health care and in the delivery of health care services. But here is a question about which I have heard very little discussion.

If someone were to wave a magic wand and insure the 50 million people who are currently uninsured, elementary logic suggests that will cause a huge increase in demand for medical services. I suspect it would be a monster increase as many maladies and afflictions which the uninsured had left untreated, would now be brought to a medical practitioner of some sort for treatment.

The supply of doctors and nurses and hospitals is fixed in the short run. How can the system deal with the increased demand for medical services with the same supply without huge disruptions?

I am not commenting on any of the competing plans but unless I am missing something very simple we should be looking to produce many more doctors and nurses and build new hospitals before we change the current system.

Again I have virtually no expertise in the area but just using some common sense it seems that there will be bottle necks and traffic jams if we do not increase supply first.