US TSY BOND UP SHARPLY, OFF HIGHS, AS SUPPLY REALITY SETS IN
15:36 EST 02/03
NEW YORK (MktNews) - U.S. Treasury bonds ended the day up sharply, but off their highs, after shorts were forced to cover as a feeding
frenzy swept over the bond market, traders said.
The bond jumped about 2 points in the first half hour of trading as traders scrambled to scoop up all available offerings on fears that new bond
supplies will be phased out over the next year.
The Treasury's announcement Wednesday that it will not only buy back $30 billion of its longer debt this year but also cut in half the amount of
new bond issuance was the spark that started the "bond-fire" Wednesday, traders said.
Then a New York Times article Thursday said the Treasury's action would ultimately eliminate 30-year bonds altogether further fuelled the
buying spree that set in at the opening bell Thursday, traders said.
The 30-year catapulted almost 3 points higher in price Thursday morning amid the feeding frenzy, to touch a low yield of about 6.05%. It later
retreated and was more stable most of Thursday afternoon to end the day up 1 20/32, at a yield of 6.16%, by 3:10 p.m. EST.
By most accounts, bond buying Thursday morning was more concentrated and intense than anyone remembered since the stock market crash
of October 1987.
"A trader sitting next to me said he got up to go get coffee at 7:15 a.m. and when he came back at 7:30 a.m., the bond opened up 1 point," said a
trader. "This is a train you just get on and don't get off of."
Treasury bond futures lagged soaring gains in the cash market, causing the basis between the two markets to implode. Still, the March T-bond
earned about a 1-point gain by the end of the session, closing up 31/32 at 94-14.
"The long-bond, that now defunct U.S. benchmark, is no longer a good gauge of the bond market's assessment of underlying fundamentals,"
said Tony Crescenzi, a senior strategist at Miller Tabak & Co.
Inevitably, there was talk that one or more hedge funds were on the verge of collapse as well as of mortgage and swap desks at major dealers
suffering massive losses, sources said. Specifically there was talk of a West Coast mortgage player being in trouble, another source said.
Other talk whispered about huge losses of as much as $750 million taken by one or more New York-based primary dealers who had been
caught on the wrong side of the 10/30 curve-inversion trade, or who had been short the bond outright, and who had barred individual traders
from trading Thursday. While none of the rumors could be confirmed, the "fear factor" was enough to provide a slight flight-to-quality bid in the
short end, traders said.
"The lesson is: don't be short Treasuries now," said one trader.
The bond's yield plunged 80 basis points lower over the past 10 days, falling from 6.76% on Jan. 18 to 5.97% for the when-issued February bond
Thursday.
After the dust settles, the 30-year Treasury, long considered the government-bond market's standard bearer, will be reduced to a basic
commodity and the market's pricing trigger will now shift to the 10-year note, traders and strategists said.
"Value is not the key determinant of the bond's price (now). Value simply has no place in a commoditized world. As with most commodities,
supply and demand are now the key determinants of the bond's price," Crescenzi said, in explaining the bond's rapid yield descent.
Economic data released early Thursday was largely ignored by The bond market amid the bond feeding frenzy.
U.S. jobless claims were reported down 5,000 to 274,000 in the week ended Jan. 29, December factory orders were reported up 3.3%, slightly
above expectations, and U.S. January non-manufacturing NAPM was 52.2 versus 55.5 in December with prices paid rising to 61.5 compared
with 56.0 in December.
Sister markets have been battered over the Treasury cutback in long bond issuance, sources said. Less bond supply creates illiquid conditions
for hedging purposes in related markets, traders said. Agency, corporate and mortgage players must now look for new hedging vehicles
because they can no longer reliably short Treasuries to protect themselves against losses.
Agency players who were long agencies and short Treasuries are "getting killed," one source said.
Most "30-year corporate deals have been put on hold now since they can no longer use the 30-year Treasury as a pricing benchmark," said
Chris Rupkey, senior financial economist at Bank of Tokyo/Mitsubishi.
The release of US January employment data may be overshadowed Friday morning by the ongoing technical gyrations in the market which has
created a "short squeeze" in bonds.
"There will be a knee-jerk reaction to the number, then we will go back to this" technically-inspired bond rally, said one trader.
At 3:15 p.m. EST Thursday the 30-year bond was trading at a yield of 6.12% compared with 6.31% at 3:25 p.m. Wednesday. -- Ellen Taylor;
(212) 509-9270; email: etaylor@marketnews.com
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