Everybody and their uncle wanted Treasury long paper. Long paper to cover shorts. Long paper to extend duration. Long paper due to bad curve
trades. Long paper because it was becoming extinct! Insurance companies, agency traders, mortgage portfolios, central banks, corporate
traders, hedge funds. Everyone wanted long paper.
The feeding frenzy continued and finally the 2/30Y curve reached -58 bps, just a tad shy of its wide of -62 bps in March 1989. The long bond yield
fell to 6.02%. For anyone short, that was a painful move. Keep in mind, the high yield on the 30Y for 2000 is 6.75%. Only last Friday, the long
bond traded in a range of 6.44% to 6.60%. It was 6.30% at Wednesday's close.
One funny guy said the question "Hey will you offer me $30 million long bonds?" has become the "new request of fear" on dealer desks!
Blood was being spilled all across the street. Agency and swaps traders were losing money on longs positions in the sister markets as spreads
widened out and they were also losing money on the treasury shorts that hedged those positions.
It has now reached the point that swaps, agency, mortgage and corporate traders realize they need to find more effective hedging vehicles. It is
said that agency traders are using short eurodollars and other agencies as a hedge. Corporate traders are using agencies and the large, liquid
global deals to hedge. Everyone is making more use of the swaps market as a hedging vehicle, sources say.
Over in the agency market, one trader made an astute remark: "The continued reduction of outstanding Treasury debt is an opportunity or crisis
for GSE's (Government Sponsored Enterprises). Either their debt will be considered an official benchmark and take on a greater role in the
market or it will become more difficult to trade without the benefit of an active Treasury market."
To that, one joker replied: agencies will not provide a benchmark for the debt markets given "these wide spreads! Continued Treasury inversion
will bring continued pain."
As the bloodbath continued, the rumors started: A few hedge funds have bad curve trades on; a European insurance company was gobbling up
bonds; an Asian or European central bank was short long bonds; an investment bank lost $100 million on one trade alone; swap desks were in
trouble; a large seller of mortgages neglected to cover its Treasury short; a bank took a heavy loss in its mortgage portfolio.
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