US TSY BONDS UP AS OTHER ISSUES FALL IN HUGE CURVE INVERSION
economeister.com
NEW YORK (MktNews) - U.S. Treasuries bonds rose sharply Thursday while other maturities fell slightly as favorable technicals sparked massive buying of bonds, inverting the yield curve from five-years out through long bonds, traders said.
The 30-year bond was up 18/32 to yield 6.52% while the two-year note was down 4/32 to yield 6.49%. The five-year note fell 9/32 to yield 6.65% while the 10-year note was off 6/32 to yield 6.69%.
The curve inversion between 5yrs/30yrs stood at a giveup of 13 basis points at the 3 p.m. EST futures close while the negative spread between the 10-year note and 30-year bond gapped out to 17 basis points on the prospect for lesser supply this year due to the Treasury buyback program and fewer bond auctions.
"That's just a techtonic shift in the yield curve," said one trader. "And (Federal Reserve Chairman Alan) Greenspan can't like to see the long bond rally 20 basis points in yield over the past two weeks" because of the stimulative effect on the mortgage market.
On Thursday, sellers of five-year note contracts were the main event in the futures market Thursday.
Two dealers reportedly each sold 12,000 Mar 5-years as talk circulated that a major mortgage desk was hurt by the inversion Wednesday of the 5/30 curve and was liquidating five-year notes, with dealers taking the other side and then offsetting that by selling futures, pit sources said.
March T-bond futures finished 22/32 higher at 91-30, a new high settlement price for the month.
In the intermediate sector, March 10-year note futures closed 1/32 lower at 94-18.5, while March 5-year futures ended Thursday nearly 7/32 lower at 97-01.5, while the March 2-year note closed at 98-26.75, for a loss of about 4/32 on the day.
Sources said many players who "counter-traded" the market recently by putting on 5s/30s and 10s/30s steepeners have been crushed. These players have been forced to unwind, which has added to the pace of today's 5s/30s and 10s/30s curve inversions, they said.
One market strategist said the rapid curve inversion in 5s/30s and 10s/30s had turned the environment "from logical trading to emotional trading." The enormous underperformance of five- and 10-year notes forced players to liquidate intermediate paper, without waiting to see if the curve snaps back, as many expect.
Many traders were also wary Thursday, waiting for the fourth-quarter employment cost index and GDP releases due Friday morning. The smart money is betting that neither release will be "bond friendly" Friday, traders said.
If the ECI is up more than the expected 0.9%, selling will snowball Friday morning, based on the fact it is one of Greenspan's most closely watched inflation measures. And a sharp rise would spark fears the Fed could raise interest rates more than expected, as soon as next Wednesday, traders said.
The February federal funds futures contract is already building in 100% likelihood of the all-but-assured tightening to 5.75% in funds. But traders point out the contract is well on its way to pricing in a 50-basis-point hike, at 27% odds.
"The two-year note is yielding about 6.50% today and that's 100 basis points above funds," a senior trader said. "That only prices in 25 basis points since the yield is keyed off the new 5.75% funds target rather than the current 5.50% level, he said. "So if the Fed goes 50 bps next week, the two-year note will get killed."
Others argue that, immediately ahead of an expected rate hike, the two-year note typically trades at a spread of 75 bps above the current, not the expected, funds target. So those traders said the two-year has more than priced in the more likely tightening of +25 bps.
Friday will also see the release of fourth quarter GDP, expected to be up as much as 6% after stronger retail sales, durable good orders, and a wider trade gap, strategists said.
Thursday's data releases included weekly jobless claims for the week ended Jan. 22, which were up 1,000 to 266,000. December durables goods orders jumped a stunning 4.1%. However, traders had little reaction to those numbers as players were fixated on the massive yield curve inversion between the 5s/30s and 10s/30s and the losses many dealers were taking on those trades.
The curve inversions are based solely on technical developments since the Treasury will be buying off-the-run bonds and possibly off-the-run run 10-years, a source said. Some mortgage selling has been seen recently and it could accelerate, others said. On the corporate calendar, GECC priced its $750 million three-year global deal at +57 basis points. Also pending Thursday are offerings from Detroit Edison ($225 million five-year), a yen-denominated (Y100 billion) Ford Motor five-year launched Thursday, and Amerco's $200 million five-year. Next week will see multi-tranche deals from Vodaphone, expected to total as much as $5 billion currently, and $1 billlion from Pemex. Also ahead are sales from BOA, Abbey National (at least $750 million), Keyspan Gas, Providian Bank ($500 million credit-card backed; launched Thursday), $500 million from Hanvit Bank and speculation BT Telcom will also be coming to market soon.
At 4:50 p.m. EST Thursday the 30-year bond was trading at a yield of 6.52% compared with 6.63% at 3:55 p.m. Wednesday. |
