Closing Comments September 19 2008

Prices of Treasury coupon securities plummeted today as the apparent agreement by the Administration and the Congress fostered a flight from Treasury debt to other asset classes. In one day the deepest fear to grip the markets since the Great Depression retreated.The yield on the benchmark 2 year note increased 42 basis points to 2.12 percent. The yield on the 5 year note jumped 36 basis points to 2.98 percent. The yield on the benchmark 10 year note soared 21 basis points to 3.75 percent and the yield on the Long Bond moved higher by 17 basis points.

The 2year/10 year spread narrowed by 21 basis points to close the day at 154 basis points.

The 2year/5year/30 year butterfly closed at 52 basis points. It closed yesterday at 62 basis points and traded midday yesterday at 74 basis points. For the uninitiated this means that the 5 year note received a clubbing relative to the 2year note and the 30 year bond.

Swap spreads tightened dramatically in the front end of the curve. Two year spreads tightened 24 basis points. Five year spreads tightened 10 basis points. The spread tightening was less pronounced in the longer maturities. Ten year spreads tightened 3 basis points and 30 year spreads narrowed about ½ basis point.

Mortgages tightened tremendously to swaps. FNMA 5s outperformed swaps by about 1 ½ points.

Agency spreads tightened by 17 basis points in the 2 year sector, 10 basis points in the 5 year sector, and 6 basis points in the 10 year sector.

The star of the day was the 10 year TIPS bond which out performed the 10 year note by about 35 basis points. The breakeven spread moved to 195 basis from about 160 yesterday.

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