Closing Notes – August 11, 2010

11 Aug

Equity markets definitely did not like the Fed’s statement today while bonds on the long end continued their ascent into the high heavens. The Sept 2010 bond future is at/near all time contract highs with a healthy dose of buying.

At one point today the ZBU0 contract were up near 2 full handles. The bearish flattening caused yield spreads to flatten considerably, although there is an interesting phenomenon, the 10s30 is at 123.4 although it has backed off from the record high around 124 on 8/10/10.

US Yields

2Y 52.2 -1.6, 5Y 143.8 -3.9, 7Y 208 -6.9, 10Y 269.9 -7.8, 30Y 393.3 -8.3

10 and 30Y leading the way today in terms of price action. There was market chatter earlier that the Fed may actually be purchasing some 30Y maturities as well. I guess that’s somewhat true if you count the original 30Y issuance that now has a maturity window sub 10Y which could affect some players who play yield spreads in the dark corners of old vs. WI bonds and everything in between.

US Yield Spreads

As mentioned earlier, bearish flattening was the theme today and it was more evident in the longer end of the curve with a couple notables:

2s5 91.6 -2.3, 2s10 217.7 -6.2, 2s30 341.1 -6.7, 5s10 126.1 -3.9, 5s30 249.5 -4.4, 10s30 123.4 -0.5

UK Yields

2Y 73, 5Y 185, 7Y 251, 10Y 314, 30Y 422

2s5 112, 2s10 241, 2s30 349, 5s10 129, 5s30 237, 10s30 108

US/UK 2Y 22, 5Y 42, 7Y 44, 10Y 46, 30Y 30

US Swap Spreads

2Y 13.8 -1.4, 5Y 16.2 -1.1, 7Y 7.0 +0.9, 10Y -0.9 +0.8, 30Y -39.3 -1.7

I made an intraday observation about the 30Y swap spread approaching what appears to be 2008 crisis levels. Indeed, these times do remind of the acute and swift moving crisis of that year, almost exactly to the month. The USDJPY is at 85 and the long end of the bond is seeing some serious buyers. For reference, the 30Y swap spread reached -54 on Nov 21, 2008. I will never forget that day, the SPX was at 800 and the 30Y swap spread actually touched -70 intraday. Just something to think about as we continue to enter uncharted waters.

Treasury Supply

30Y bonds tomorrow, details here

That concludes this week’s supply of Treasuries. Will have analysis of the upcoming supply calendar posted later this week.

10Y auction chart has been updated, you can view that post here

Corporate Update

Tim Backshall of CDR has some wonderful insights on what has happened with Ambac/MBIA and the Financials today. I am constrained for time to do a corporate update today, unfortunately. I can say that ahead of the GM IPO, GM debt was actively traded today with some pretty impressive buying. I will have more time for a corp update later.

Some Parting Notes

I see opportunity in the long end of the curve, despite the “Fed Risk”. The only thing is timing and adjusting your trade expectations. These times now call for a tactical shift (I borrowed this term from David Ader over at CRT), opportunistic short term trades are the key now again. Stay nimble.

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