Closing Comments September 18 2008

Prices of Treasury coupon securities are registering chunky losses today in a session that was truly one of the most volatile that I have ever observed. The yield on the benchmark 2 year note has jumped 15 basis points today to a yield of 1.78 percent. The yield on the benchmark 5 year Treasury has climbed 12 basis points to 2.64 percent. The yield on the 10 year note rose 10 basis points to 3.51 percent and the yield on the Long Bond has climbed 5 basis points to 4.12 percent.

That simple recitation of yields and daily yield changes does scant justice to the wild price movement and spread movements which traders witnessed today. The 2 year note traded to a low yield of 1.37 percent. The 5 year note traded as low as 2.34 percent. The benchmark 10 year touched 3.31 percent and the Long Bond traded at a low yield of 4.05 percent.

The range on the 2 year note was 41 basis points. That is a mini interest rate cycle! That price movement generated corresponding volatility for spreads along the yield curve. My favorite spread is the 2year/ 10 year. It opened the day around 170 basis points and proceeded to trade as wide as 194 basis points when the 2 year note was at its richest point. That spread has currently retreated to 173 basis points.

In like manner the 2 year/5year/30 year butterfly which it is my custom to observe here daily as an indicator of the movement of the belly against the wings had a roller coaster ride, too. At the most expensive yield levels of the day it traded at 74 basis points. It is closing at 62 basis points reflecting the underperformance of the 5 year note in the sell off.

The Treasury bill market maintained a strong bid throughout the day. I spoke with a trader who was kind enough to pass along his 300PM marks. Yesterday he closed the one month bill at 5 basis points and today the bill closed at 2 basis points. The three month bill at 300PM yesterday was trading at 4 basis points and today its yield doubled to 8 basis points. The 6 month bill closed yesterday at 95 basis points and its yield dropped to 60 basis points today.

With the huge rally in the stock market bills have sold off 20 basis points since these marks were placed at 300PM.

I think the performance of the bill sector is superb in light of the ocean of supply offered by the Treasury as it places the Federal Reserve’s balance sheet on steroids. With the issuance of bills that began yesterday and concluding Monday the Treasury will have pumped $200 billion bills into the system.

The background for trading today was the coordinated efforts of the central banks to flood the system with liquidity, the ongoing trials of money market funds and especially the “break of the buck” by a fund managed by Bank of New York Mellon, and finally the news that Secretary Paulson is shopping a 21st century version of the RTC.

I think that the only way out of the mess is to reflate and inflate the system. Against that background, I think that over time the long end of the bond market will need to move to higher yield levels. I do not think that a 4.00 percent Long Bond is ample compensation for the future inflation which is being concocted here.

Mortgages are about 18 ticks tighter to Treasuries on the day. Since the RTC story hit the tape the FN 5 ½ is better by 5 ticks and the 5 year Treasury is one point weaker.


Originally published at Across the Curve and reproduced here with the author’s permission.

2 Responses to "Closing Comments September 18 2008"

  1. Guest   September 18, 2008 at 8:54 pm

    Paulson is offsetting the $100bn into the Fed by draing the funds from the market!There is no net liquidity being generated — the proof of which will be another move down in gold.

    • Guest   September 19, 2008 at 12:59 am

      I thought the Fed could drain the funds, not the Treasury.But even if so, it would be the same old story. Liquefy the banks and take the money out of the pockets of the common man. As they have been doing for six months or so now.