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.

UBS on Jobless Claims Et Alia

Here is a short piece from UBS economists on some of that economic data on the docket tomorrow July 23 2009:

Preview: Claims up, but trend down; existing home sales up again
(1) We forecast only a partial reversal (+53k) in initial jobless claims after the cumulative 95k decline in the last two weeks (UBSe: 575k, cons: 557k, after 522k). The plunge in the last two reports was clearly exaggerated by seasonal adjustment problems relating to the timing of annual manufacturing plant shutdowns (as we expected). Claims should be much less affected by such seasonal adjustment problems in the upcoming report, although the data will not necessarily be “clean” yet. Through the volatility, the trend appears downward, although the level is still high enough to be consistent with large monthly declines in payrolls (see chart). (2) The recovery in existing home sales probably continued into June (UBSe: +2.0%, cons: +1.3%, after +2.4% in May), even allowing for an increasing share of sales contracts falling through before deals are finalized. Although the pending home sales index (PHSI), which is based on initial contracts, rose just 0.1% in May, it rose 13% in the prior three months. (3) Also on Thursday: mass layoffs (June) and the Fed’s balance sheet data.

Bond Market Close July 22 2009

Prices of Treasury coupon securities sagged today and the severest drubbing was in the longer dated securities. Let me record some yield changes and curve shifts and then I will delve into the causes of the price action.

The yield on the 2 year note increased 2 basis points to 0.94 percent. The yield on the 3 year note increased 4 basis points to 1.48 percent. The yield on the 5 year note increased 6 basis points to 2.40 percent. The yield on the 7 year note increased 7 basis points to 3.10 percent. The yield on the 10 year note climbed 6 basis points to 3.54 percent and the yield on the Long Bond also climbed 6 basis points to 4.45 percent.

The 2year/10 year spread widened 4 basis points to 260 basis points.

The 10 year/30 year spread is 91 basis points.

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

So why the soggy bond market and why the steeper yield curve today?

I think that there is a two pronged and somewhat delayed reaction to the Bernanke testimony of yesterday. I think that one can conclude from the testimony that the Federal Reserve is very, very serious about keeping the funds rate at very low levels for an extended period of time. There paramount concern ( and one can argue about whether they are right or wrong) is to jump start the economy and to prevent weak labor markets from initiating a round of Japanese style deflation.

Against that background holders of longer dated assets are feeling some trepidation, pain and angst and have chosen to exit some positions.

The Federal Reserve stance on keeping the funds rate at or near zero is also a positive force for the 2 year and 3 year part of the curve. Currently, the 2year note trades at about negative 25 basis points in the repo market.

Positive carry is a very potent force. Against a Negative 25 basis point repo rate the breakeven yield on the 2 year note a year from now when it has travelled down the curve to the one year point is 2.50 percent. (Someone calculated that for me seat of the pants so it is probably not totally precise.)

The salient point is that with the funds rate at zero for “an extended period” the carry gains are immense and one has lots of wiggle room if he or she guesses wrong.

Foreign central banks have also become traders. Sources report that some of the bigger players view the range on the 10 year note as 3 5/8 to 3 1/4. In the upper 3.40s they are rather indifferent as they follow the advice of Polonius to Laertes and choose to refrain from borrowing or lending. Those clients are on a buyers strike until the 10 year trades in the upper 3.50s which would place it in the back end of their perceived range and make them comfortable buyers.

Separately, another trader felt that the final thrust on the 10 year note was led by servicers with convexity needs and with their appetites sated there is no significant bid from that quarter.

Tomorrow the treasury will announce 20 year TIPS, 2 year notes,, 5year notes and 7 year notes. Estimates are for a package of about $ 110 billion which would be the largest financing package since man learned to walk erect.

The 2year note should be around 5 1/2 basis points. The 5 year roll and the 7 year roll are predicted to be about 3 1/2 basis points.

Have a great evening.

Swaps and VOL and MBS

Swap spreads are mixed today. Two year spreads are unchanged at 43 1/2. Five year spreads are 1 3/4 basis points narrower at 46. Ten year spreads are 1/4 basis point tighter at 20 1/4. Thirty year spreads are 1/4 basis points wider at NEGATIVE 24.

One salesperson noted some conversations regarding the strength in the yen. Some believe that yen at these levels or stronger will lead to a round of receiving by the exotic community. Those very strange folks were the proximate cause of the kerfuffle which drove 30 year spreads (briefly) into the negative 60s and 70s last year.

Personally, I sleep a little better at night when I am long a little bit of vol.

Mortgages are 3 ticks tighter to swaps.

The three month/ten year ATM swaption straddle is 622 mid. When I quoted it earlier today it was 626.

Agency Spreads

Agency spreads are unchanged in the 2 year sector and a basis point tighter in the 5 year sector. Ten year spreads are a basis point wider.

Federal Home Loan Bank priced a 3 year note today at T+35. This issue has not budged and is 35/34.5.

One analyst with whom I speak regularly thinks that notwithstanding the tightest spreads in two years, the risk is that spreads move tighter from here.

There is very little supply and Freddie Mac has engaged itself by buying back debt. The GSE has purchased floaters and subordinated paper thus far. One analyst suggested that Freddie might be involved shrinking its balance sheet as mandated by the conservatorship agreement when the wheels fell off the GSE bicycle last September.

The conservatorship agreement stated that Freddie would begin to reduce its balance sheet by 10 percent each year beginning in 2010. Here is a paragraph from the statement which then Secretary Paulson issued last September as FNMA and Freddie Mac were passing into financial oblivion and redundancy:

“To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.”

Anyway,one observed thinks that the “unwinding” might be underway as we speak.

MBS and Some VOL

Mortgages remain in line with swaps.

There has been some pick up in origination selling as rates have declined but that selling has been met by the steady force of buying by the Federal Reserve purchases.

The three month/ten year ATM straddle is 626 basis points this morning.


Mortgages are opening very quietly and are a couple of ticks tighter to swaps.

The level of activity is very subdued.

Some Spreads

Morgan Stanley earnings disappointed investors this morning and that has precipitated a sell off in corporate bond spreads and in financial names in particular.

Some Morgan Stanley paper is as much as 20 basis points wider from previous day closing levels.

And the recent Citibank deal is now underwater. It is 385/380. It priced at 375 and I observed a 366 bid yesterday.

Swap spreads are little changed.

Thirty year spreads are one basis point wider at NEGATIVE 23 1/2. Two year ,five year and ten year spreads are unchanged at 43 1/2,47 1/2 and 21, respectively.


By Brad Skillman
July 22 (Bloomberg) — Charge-offs on U.S. credit cards as
measured by Moody’s Credit Card Index rose in June, reaching a
record 10.76 percent.


William O Donnell is an analyst and strategist with RBS Securities  (the firm formerly known as Greenwich Capital). He publishes an excellent piece each morning.

He notes in his report this morning that investors have been busy unwinding Bund/Treasury trades. Bunds have lagged Treasuries by 8 basis points to 9 basis points over the last 24 hours, according to the RBS analyst.

Bond Market Open July 22 2009

Prices of Treasury coupon securities are virtually unchanged in overnight trading. The 2 year note yields 0.92 percent and the 3 year note yields 1.45 percent. The yield on the 5 year note is 2.34 percent whilst the investment grade 7 year note yields 3.03 percent. The 10 year note yields 3.48 percent and the Long Bond yields 4.39 percent.

The 2year/10 year spread is 248 basis points.

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

The 2year/5 year/30 year spread is 63 basis points.

Chairman Bernanke will trek back up the hill and deliver the second round of his testimony to the Senate. I believe the opening statement is always identical to that which he offered the House yesterday. If he is to break any ground it will be in the Q and A.

We receive FHFA home price data for May today. The consensus is for a 0.2 percent decline. It declined 0.1 percent in April.

I do not have  strong opinion about the near term course of interest rates. If you held a gun to my head I would focus on the equity markets which appear to want to do better. I guess if we can improve from current levels that will sap energy from bonds as supply approaches next week.

I think I will just sit back and watch how the day develops.

Markets vs Teams

Last week, I had the pleasure of attending a small panel discussion between Jason Green (General Partner at Emergence Capital and investor in companies such as DoubleClick, aQuantive, and Ask Jeeves) and Reid Hoffman (Founder of LinkedIn, EVP at Paypal, and angel investor in over 60 startups such as Facebook, IronPort, Flickr, and Digg). During the panel, the question of market vs team in venture/angel investing came up. Jason was in the “team” camp while Reid was more in “market” camp – but these are very broad generalizations and both emphasized the importance of both in any investment they make. Examples were discussed that give credence to both strategies working and it largely being a personal investing preference. On several occasions, I have heard this debate of market vs team with Sequoia and Kleiner Perkins being used as the poster children for each view point, respectively. Its a discussion item that I’ve heard on a number of occasions, and I can see the arguments on both sides. While I sometimes hear the scenario being, would you rather invest in a great team in a crappy market or a crappy team in a great market, in general practice, the more realistic scenario for an investor may be, would you rather invest in a A+ team in an A- market or a A- team in a A+ market or a A+ team in an unknown/unclear market or an unproven team in a A+ market. This is where, at least for me personally, I spend more time thinking about. When the VC funnel is 1 investment out of 100-200 companies/business plans seen, the expectation is that they are choosing from a few companies that have the A+/A- or A+/unknown dynamic – and have already weeded out the B or C teams and markets in the vetting process. It can be difficult to do a post-mortem on successful or failing companies to try to see a trend because, as the saying goes, success has many fathers (in this case it is both people and market) and failure has none. People often attribute success of a company to the founding/management team (which may or may not be accurate) but the more interesting question is, “before the company was successful and was a startup with 3 guys and powerpoint deck, how did the VCs rate the team.” Also, there are enough examples of what is initially felt to be a great team failing. I was not personally familiar (so please correct me if I am inaccurate) with some of the larger Southern California successes when they were just being founded but from hearsay, the teams at LowerMyBills and MySpace had trouble raising venture capital very early on yet went on to becoming huge successes and the teams eventually proving themselves to be great founders and operators. While they both raised venture funding later in their lives, it was beyond the very early stage and they had proven themselves on several fronts from an execution perspective.
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