Hi Don, great to see you here!! The notes and bonds have
been in melt-down mode the past 5 days and wed and thurs
have really been bloody.
johnpsmarketlab.netfirms.com
We had a pretty neat double bottom in yield (top in price)
on the 10 year notes recently, a bottom in yield at 4.10
on 10-5-98 and then again on 11-1-01 at 4.09.
It's hard to overstate how big this trend change could
well be for Equities, commodities, the USD. etc.
a description of the battlefield
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Treasury Summary: The market looked just about as bad today as the Boston Red Sox did in game 6 of the 1986 World Series, but to add insult to injury, imagine Bill Buckner letting a grounder go through his legs five consecutive days in a row. The curve got slammed again as talk of the Fed passing at the next meeting went around, stocks held a bid, data was in line but not bullish, accounts looked to spread product and technicals were broken left and right.
The overnight markets did not serve to buck the trend we have seen of late, as selling dominated from almost all facets of the market. Asian banks and prop desks were originally sellers on rumors that Bin Laden was captured, and while some buying the dip emerged, swap desks and hedgers picked up the pace of selling in Europe. Of note, it was this hedging of corporate deals that some we were in contact with pointed to in recent sessions as being one of the catalysts for the weakness. Well while there very well may have been some weakness on hedging, it was certainly not recovered today after the pricing of AT&T, which was certainly the focal point of the deal related talk.
Another factor one may look at with respect to the weakness was the relative performance of mortgages today, with 30-year GNMA premiums holding positive levels against a 10-year that is down by a almost two points at times, there was talk of flows out of Treasuries into mortgages. Similar support was seen in both FNMA and FHLMC paper, with premiums holding in to almost unchanged while losses began to pile up as you moved down the coupon stack (deep discounts underperformed the rest of the market but outperformed Treasuries by around a full point). Of note, adding support to this was the fact the FHLMC released the results from their monthly mortgage survey, which showed 30-year fixed rates increased by 6 bp to 6.51% on 30-year fixed rates.
While a brief blip was seen heading into the close of the buyback operation, the name of the game today was selling. Technicals became a factor late in the session as first 4.00% was broken on the 5 which may or may not have been driven by convexity hedging unwinds, and prerequisite front runners. Then the long end went, with 10s breaking one trader's support of 4.68%, and bonds breaking 5.12% (by no small margin). And, while 2s held this trader's level of 3.05%, 5s came back inside previously broken support of 4.05%. At this point in time, sell stops were triggered and the market seemed reluctant to cover recently established shorts.
All together a very ugly day that has some quietly talked about the Fed passing at their next meeting, which could be echoed by Fed funds futures pricing in around a 30% chance of 25 bp at the next meeting and the fact that eurodollars fell under a fury of long liquidation today, which also mirrored the performance in 2s, as they picked up over 25 bp in yield (bringing them flat to levels seen in the first session after the events of 9/11, which we find very interesting). Also of interest, the long bond is yielding, give or take, what it was yielding the day before it's issuance was "postponed," and the 10-year is over 35 bp higher in yield than it was that same day, therefore the scarcity premium for the long bond is completely gone, and the premium attached to the 10-year as the "long benchmark" is completely negated. It is as if the bond elimination never happened. Does this mean the end of the road for yields grinding lower? we do not think so, but some we are in contact with do. And, while the fundamental economic picture has not changed, we have to pay some respect to those who hold that opinion, and at least give it a bit of thought at this point.
Looking Forward: Tomorrow we get, most importantly, Friday. However, we do have some data to wade through as CPI is released, which the vast majority of those we have talked to feel will be bond friendly. Also, industrial production and capacity utilization is released. And, with no Treasury activity and no events on the calendar, we expect the market to rest its tired bones tomorrow and perhaps start the weekend early.
The 2/30 spread flattened to 225 bp at the time of the futures close at 15 ET from 232.8 bp late Wednesday.
December T-bonds were lower by 72/32 at 106-09, 10-years were 52+/32 at 107-30. |
