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Friday, May 22, 2009

BOND MARKET by John Jansen

Bond Market Open May 22 2009

Prices of Treasury coupon securities in overnight trading have performed their periodic imitation of a moribund feline striking the pavement after falling from on high. In that case and in the case of the bond market today the bounce is quite minimal.

The yield on the 2 year note has declined a basis point to 0.85 percent. The yield on the 3 year note has edged lower by a basis point to 1.35 percent. The yield on the 5 year note is unchanged at 2.14 percent. The yields on the 10 year note and the 30 year bond have each declined a basis point to 3.35 and 4.30, respectively.

The 2year/10 year spread remains near historically wide levels at 250 basis points.

The 2year/5year/30 year spread is as narrow (cheap ) as it has been anytime since the Federal Reserve announced QE. It sits at 87 basis points this morning . Previously, we had not moved below 88 basis points and 90 had been support.

There are no economic releases today and because of the Memorial Day holiday on Monday it will be an abbreviated trading session.

Yesterday was an exciting and dramatic day and the type of  session that makes following markets a huge rush of adrenalin and an interesting cerebral exercise.

I cited quite a few reasons for the debacle yesterday. In a sense they are mostly after the fact rationalizations.

The one reason which makes the most sense is that the dealer community was in a rush to set shorts for the latest iteration of supply which begins on Tuesday. Trading will be brief today and the opportunity to establish outright shorts or arbed shorts will be limited.

I think the salient point is that positions in the street (long or short) always get liquidated eventually and the trading firm position returns to zero.

So the price action yesterday was the street getting short in advance of supply with the knowledge that the bidding process next week would take them to zero.

The buyback and the UK downgrade story matter but if had not been those stories it would have been another.

The simple fact is that the US Treasury has too much paper for sale and we have not yet discovered a price which clears the market. It will be fun watching as that process unfolds ( if you enjoy watching car crashes, train wrecks, and disaster movies)

I am long 1000 IEF which I purchased yesterday around this level in the 10 year note.

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