Prices of Treasury coupon securities surged today as persistent buying in the long end of the market sparked a rally across the curve. Money managers and pension fund players in need of duration waved in the 10 year sector and the 30 year sector.
The yield on the 2 year note slipped 4 basis points to 1.13 percent and now sits at approximately the all-time low attained in the heady days of June 2003. The yield on the 3 year note dropped 5 basis points to 1.43 percent. That issue is trading 30 basis points cheap to the 2 year note. On the day of the auction last week it actually traded at 58 basis points. Later this week the Treasury will announce a new 2 year note for auction next week. The forward roll will be about 7 basis points. That will put the 2 year/3 year spread in the low 20s and that will make it look very expensive.
The yield on the 5 year note declined 7 basis points to 2.20 percent.
The yield on the 10 year note plummeted 12 basis points to 3.53 spread. I rarely talk about the 5 year/10 year/30 year butterfly. In early September the 10 year note traded 10 basis points cheap to the 5 year and 30 year. At one point prior to the refunding the spread reached 105 basis points and on auction day the spread was 95 basis points. It was very cheap, and I think that motivated some of the buyers today. That spread is closing the day at 73 basis points.
The yield on the 30 year bond dropped 6 basis points to 4.13 percent.
The 2 year/10 year spread narrowed 8 basis points to 240 basis points.
The 2 year/5 year/30 year butterfly is closing at a record 86 basis points. The 5 year flattened 3 basis points versus the 2 year note while it steepened a basis point versus the 30 year bond.
Corporate bonds
The corporate bond market as measured by the IG 11 has begun to crumble. The index is currently quoted 226/228, which is about 19 basis points wider on the day. Why the sharp spike out in that spread today? I think it is partly a result of the significant widening in other spreads. I posted earlier about the subprime market and the CMBS market and the significant weakening in those sectors. It would be uncharacteristic for the corporate market not to follow suit.
There are other factors at work, too. The much heralded and universally acclaimed corporate child of that avuncular multi billionaire from the heartland Warren Buffett, Berkshire Hathaway (BRK.A), has seen some trouble in its CDS spreads. The company is AAA but the CDS is wrapped around 400 and is 25 wider today. That has caused a bit of angst (and probably some schadenfreude) among participants in the corporate bond market. It reminds me of a Latin phrase, Quis custodiet ipsos custodes? Loosely translated it means, Who shall guard the guards themselves? The ever vigilant market is watching Berkshire and apparently does not like what it sees.
Finally, the decision by Secretary Paulson to ask the Congress for a second tranche of TARP money has soured sentiment. In effect he has handed the credit market problems to the incoming Administration and unless there is something on the order of an AIG, Lehman or Bear he will watch the rest of the game from the dugout.
Without the Treasury pumping money into the system the market has lost its marginal buyer, and in the current risk-averse environment there are too many days between now and the inauguration.
Verizon Wireless is bringing a 10 year deal. The talk is T+ 5 1/8 to 5 ¼. There is an outstanding Verizon 10 year (different credit than this issuer Verizon Wireless) and that credits bonds are around 490. Those bonds recently priced at T+ 4 7/8 and had pushed their way close to T+400. This issue today clobbered those bonds at +490 they are underwater relevant to the pricing level.
The bottom line is that in spite of a recent spate of buying, the corporate market is still quite dysfunctional.
My favorite bond, the American Express 5 year note, is 660/630.
The GE 10 year is 360/340.
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This article has 4 comments:
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Pipo
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Nov 18 06:56 PMjimrogers-investments..../
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DaveJ
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Nov 18 10:18 PM-
fatcat
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Nov 19 12:49 AM-
sumosama
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Nov 19 12:29 PMRogers has made a fortune and will lose a large chunk of it.