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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (6207)	5/29/2002 1:47:09 PM
From: John Pitera	Respond to of 33421

FOMC--OPEN Market Ops--Convexity Mtg. Buying... app.ny.frb.org always a useful link .... FED OPEN Market Operations. a bit of color..... 10:57 ET 10-year: +5/32..5.107%....GNMAs: +2/32....$-¥: 124.26 Some color on the new 2-yr from a primary dealer. This fellow indicates that there has been a huge seller in the maturity over the last couple of hours, however it is trading well, which is supportive of its resilience. So, the indication is that perhaps this auction may go better than expected, with the street beginning to get short by selling into strength. Also, with the potential for a threat of disruption in the June 2-yr (read, debt ceiling), some may be looking more toward this one. Good bid seen for the when issued, too. ---- 10:48 ET 10-year: +3/32..5.113%....GNMAs: +2/32....$-¥: 124.32 For reference, GE Capital 6 1/2s of 12/07 are being offered around 98 bp over Treasuries, and 8 1/8s of 5/12 are being offered around 114 bp over. We would expect the new issue to come in this neighborhood, perhaps a touch wider. ------------- A couple of thoughts on swaps. First, with the recent uptick in corporate issuance, we have seen swaps come in by a good margin, with 10-yrs inside of 50 bp. Now, look at this in conjunction with 10-yr Treasuries at around 5.11%, and we would say that the threat of convexity buying definitely looming. Why is this? Because, should the curve rally by anywhere near 10 bp, and the bias in swaps continue to be towards tightening, we would have the potential to see a couple of trigger levels simultaneously. That is, we would be near the 5.05% level in 10-yrs (darn close to 5.00%) and 5.50% in swaps. And, while this may not set off a round of buying, some front running could be seen. Sure, we do not know for sure whether or not this will happen, as the only ones to have that type of information are those who execute the trades, but we have seen activity at levels like those in the past. Just something to be mindful of. More on Convexity Buying Message 16801840