Closing Notes – Aug 13, 2010

13 Aug

Abbreviated notes for me today since I decided to “take the day off” and step away from the market action. However, there are some noteworthy things I want to recap that you should keep an eye out for in the coming week.

The long end of the curve continuing to see a lowering in yields, which is now putting a bear flattener squeeze on those who were originally in the steepening camp. Most notable is the 5s30 and 10s30 spreads which have both pulled back from their all time highs. I am waiting for confirmation that this trend will continue, especially once the Fed ramps up their Treasury purchases. One key thing you must note is that they are not going to just buy Tsys for the sake of buying them. As their MBS portfolio matures, their mandate is to keep the notional level at the existing 2T. One has to assume that all the MBS’s they purchased over the past year will not be maturing at a rapid rate (i.e. an avalanche of maturing debt in 2010-11). I’ve heard some people talking about this while out, and it’s like someone put a cheese grater on my rear end. Part of me wishes the bond market would slink back into obscurity, I fear that there will be a “Bond Trading For Dummies” book out shortly, which in my mind will definitely mark the “top” of the bond bubble.

US Indicative Close

2Y 54.5 -1.3, 5Y 146.3 -1.5, 7Y 207 -4.3, 10Y 269 -5.8, 30Y 387.3 -7


2s5 91.8 -0.2, 2s10 214.6 -4.5, 2s30 332.8 -5.7, 5s10 122.8 -4.3, 5s30 241-5.5, 10s30 118.2 -1.2

Swap Spreads

2Y 16.5 +0.3, 5Y 19.7 +0.5, 7Y 10 +1.3, 10Y -4.1 -1.2, 30Y -44.3 -5.5

US Yield HV

10D: 2Y 76 -2, 5Y 50 -2, 7Y 36 -1, 10Y 27 -1, 30Y -1

30D: All values unchanged: 2Y 65, 5Y 48, 7Y 36, 10Y 29, 30Y 21

US Yield Spread HV

10D: 2s5 43 -2, 2s10 21 -1, 2s30 15 -1, 5s10 32 +4, 5s30 28 +3, 10s30 36 +1

30D: 2s5 48 -1, 2s10 25 unch, 2s30 18 unch, 5s10 26 +2, 5s30 22 +1, 10s30 29 unch

Some things I would look for in the coming week will be a potential continuation of the bear flattening theme, especially on the long end of the curve. Over the weekend I will post more analysis on the extraordinary moves we have seen in the spreads, particularly to the flatter side. For reference, the 2s30 has gone from near 350bps to 330bps within the month while the 1s030 and 5s30 have both widened out to record wides and now appear in the short term to be flattening.

Another thing to watch next week is USDJPY and the 30Y swap spread. Today’s move puts us at roughly a 2SD move, measuring 2008-present from the mean over the same timeframe (30Y Swap Spread). I am not going to get in front of a steamroller the 2nd time (those of you who have known me throughout the financial crisis of 2008 know that it was this same spread which caused me much consternation that fall) – however, it’s worth looking at. For those who aren’t familiar with swaps and swap rate futures, a good proxy for this right now is the USDJPY. I’ll dig out the previous notes I’ve written on this topic for this weekend (No vacation for me???)

As always, please feel free to leave comments, suggestions. Have an excellent weekend.


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