Across the Curve

History Lesson

I begin my new work enterprise at TD securities in about nine hours. I want to thank everyone for the warm and gracious response to the news.

I want to reiterate that the future of the blog is undetermined as I write this.

If you desire to establish a professional relationship and bask in my dulcet tones via telephone, please contact me .

If you have access to Bloomberg I will appear on that system early this week and you can contact me via that system.

And here is a link to an article by ubiquitous and prolific UK historian Niall Ferguson who pens a penetrating piece in the current issue of Newsweek on the prospects of a mountain of debt leading to the decline and fall of the American Empire.

As I reconnect with the world of government bonds sales, he securely makes the point that there will be no paucity of product.

Posted in Uncategorized | 28 Comments »

Brown Brother Regarding Banks

Heightened concerns about the global banking sector are front and center today. There are two press articles to note.  The first is the FAZ story warning that the two regional banks that hold a majority stake in West LB indicate they are prepared to let the bank become insolvent.  This may be an attempt to force capital injections by the German government.  At least 6 bln euros may be needed by the end of the month.  The second is an FT article reporting on an S&P study on the financial strength of large banks ahead of the new revised Basel II rules expected early next year.  Simply put, some banks are better capitalized than others.  S&P says, for example, that Japanese banks are among the least capitalized.  Fitch echoed this sentiment noting the weak loan quality and poor capitalization by international standards.   The Topix bank share index lost almost 4% today.  At 131.12, it is within a few percentage points off the multiyear low set in March near 125.65 and puts the index 30% off the highs set in mid-June.  In contrast, the IXM, which the Financial Selector Sector Index, behind the XLF exchange trade fund, finished yesterday at 147.56, 12.4% off the year’s high recorded in mid-Oct at 157.20, and 155% above the March low.  Separately, the IMF’s Strauss-Kahn warned that only half of bank losses have been recognized and that many banks were undercapitalized.  As of Sept, the IMF had estimated that banks held $1.5 trillion in toxic assets.  In the US news reports indicate that the Fed has asked nine of the banks that received TARP funds to submit plans for repayment.  The 9 banks that were part of the stress test earlier this year took a little more than 20% of the $700 bln TARP funds.  Lastly, in the deluge of bank sector stories today, note that concerns over Chinese banks for new capital helped fuel the largest sell-off of the Shanghai Composite since the end of August.  China’s five largest banks submitted to the government preliminary plans to raise capital.   While US and European banks need to raise new capital to replace the capital lost, Chinese banks lent a record CNY4.7 trillion (roughly the size of TARP) and need to rebuild its capital to hit the capital ratio targets.  These concerns taken en toto have encouraged some selective reduction of risk appetite today.

Posted in Uncategorized | 5 Comments »

Bond Market Open November 24 2009

Prices of Treasury coupon securities are posting modest gains in overnight trading.

We are well into the holiday we and I suspect that trading volumes will be on the light side,notwithstanding the chunky auction of 5 year notes later today. That process should dominate the bond market landscape as dealers put scarce capital at risk.

David Ader atCRT make several salient points about this auction. Of the last twenty five 5 year note auctions, only four have stopped through 100PM market levels. There are several reasons to anticipate the same result today.

As I noted earlier it is a holiday week and many players are on vacation or will be shortly. That will dampen bidding as the larger players will not return until after the holiday.

If one misses the auction today, there is no reason to panic as the Treasury as a round of 7 year notes on the block tomorrow. So this is not exactly one’s last opportunity to buy bonds.

Of more immediate concern to bidders is the release of the minutes of the last FOMC which will be available one hour following the bidding for the 5 year note. Mr Ader at CRT makes the important point that the Bernanke speech last week trumps the minutes in that it will be difficult for the chronicle of that meeting to offer a more dovish spin on the Fed than did the Bernake speech.

So in a sense it is possible that the minutes can only deliver bad news to the bond market as the Bernanke speech has already broadcast a broadly bond bullish story.

Overnight the German IFO was better than expected and European IP registered solid gains.

The yield on the 2 year note declined a basis point to 0.77 percent. The yield on the 3 year note slipped 2 basis points to 1.24 percent. The yield on the 5 year note is lower by a basis point at 2.16 percent. The yield on the 7 year note declined 2 basis points to 2.86 percent. The yield on the 10 year note dropped a solitary basis point to 3.34 percent. The yield on the Long Bond declined 2 basis points to 4.26 percent.

The 10 year/30 year spread is a tad flatter at 92 basis points.

The 2 year/10 year spread is 257 basis points.

The 2 year/5 year/30 year spread (using the new 2 year and the WI 5 year note) is a tad cheaper at 63 basis points.

Posted in Uncategorized | 4 Comments »

Preview of Economic Releases November 24 2009 Via UBS

Preview: Confidence, home prices, GDP, ASA staffing, FOMC minutes

(1) The Conference Board consumer confidence index probably fell again in Nov. That would match the pattern in other measures in early Nov. (2) Home prices have turned upward since Q2, probably reflecting strength in underlying demand, a temporary boost from the homebuyer tax credit, a mix-shift away from sales of distressed homes, and some boost from seasonal factors. However, price indicators began to soften in Aug and Sept. We forecast a small decline in the FHFA home price measure in Sept (UBSe -0.2%, cons +0.1%). However, the S&P/Case Shiller  composite 20 measure probably rose (UBSe 0.2%m/m, -9.6%y/y, cons -9.1%y/y, after -11.4%y/y): It tends to lag other price measures partly because it is based on three-month averages; the Sept reading will reflect transactions in Jul, Aug and Sept. (3) We estimate that Q3 real GDP growth will be revised down by 0.7 point to a +2.8% annual rate. Much of the weakening (-0.6pt) reflects more strength in imports than was first assumed. Also, consumer spending and business structures will likely be revised down marginally. We expect little change in the inventories component. The rapid inventory liquidation through Q3 suggests that they will contribute to growth in Q4 and 2010. Profits likely surged on a Q/Q basis but remained down Y/Y. (4) ICSC and Redbook measures for early Nov were mixed: The ICSC measure has slipped slightly w/w and stalled m/m, but the Redbook measure continued to rise. (5) The American Staffing Association (ASA) will release their temporary staffing index (week of Nov 9-15) on Tuesday before noon. It has risen for nine consecutive weeks on a not seasonally adjusted basis. The acceleration, after adjustment for seasonal patterns, suggests a further pick-up in reported monthly temp payrolls, which tend to lead total employment. (6) Nov 3-4 FOMC meeting minutes will be released, including updated central tendency projections by FOMC members.

Posted in Uncategorized | No Comments »

Bond Market Close November 23 2009

Prices of Treasury coupon securities are posting small mixed changes on this day when the Treasury began the process of regurgitating $ 116 billion of securities via sales of 2 year notes, 5 year notes and 7 year notes.

In initial trading this morning the curve steepened rather sharply and 2year/10 year reached a cycle high  of 267 basis points. At that level buyers deemed the 10 year note attractive and as I pen this note the spread is 263 basis points.

In early trading sellers spanked the Long Bond and that issue has enjoyed a range of about one point.

The level of activity is on the modest side. Prior to the auction one prop trader noted that volume in the brokers market in the WI 2 year note was just $ 11 billion. He said that a normal level of activity would have between $ 15 billion and $ 20 billion of those securities trading.

The result today was rather lackluster. There was a very small tail which manifests that lack of liquidity which prevails in this holiday week. I think that each of the next two auctions will produce sloppy results as there is very little opportunity to easily exit positions.

The yield on the 2 year note is one basis point higher at 0.73 basis points. The yield on the 3 year note is a basis point higher at 1.26 percent. The yield on the 5 year note is unchanged at 2.17 percent. The yield on the 7 year note declined a basis point to 2.89 percent. The 10 year note is unchanged at 3.36 percent. The yield on the Long Bond is unchanged at 4.29 percent.

The 2 year/10 year spread is a basis point flatter at 263 basis points. That is actually a pretty good result on a day in which the taxpayers sell $ 44 billion of the issue.

The 10 year/30 year spread is unchanged at 93 basis points. I will go out on a limb and suggest buying 30s and selling bonds. In a quiet market with all the supply about to weigh down sentiment in the belly, the Long Bond should outperform the 10 year note. Mark the trade at 93 bps.

The 2 year/5 year/30 year spread is 68 basis points. I would sell the 5 year note against the wings as the supply should cheapen that issue versus 2s and 30s.

Posted in Uncategorized | 5 Comments »

Two Year Auction Color VIA RBS Securities

$44B in new 2yr notes come at 0.802% or right on top of 1pm levels.
*U.S. AWARDS 44.5% OF 2-YR TO INDIRECT BIDDERS
*U.S. TWO-YEAR NOTES BID/COVER RATIO 3.16 AT AUCTION

Direct bidders took 4.7% of the auction (well down from last month and back to averages seen before Sept. The Dealer award of 50.8% which is the highest since July of this year.

A very clean auction close to recent averages for all categories. Indeed, the VERY light flows in 2yrs seen today only brought the auction stats back to normal from “stellar.” Two year notes are little changed after the results.

Posted in Uncategorized | 2 Comments »

Two Year Result

The 2 year stopped approximately at the level at which it was trading prior to auction.

The auction yield was 0.802.

Posted in Uncategorized | 1 Comment »

Two Year Note

In a few minutes the Treasury ( for the second time ) will auction the largest batch of 2 year notes issued since man began to walk erect.

Traders believe that it will go quite well and expect a stop inside of market levels ( currently 0.80 percent).

Posted in Uncategorized | No Comments »

Corporate Bonds

Corporate bonds are firm at the open as investors genuflect to the strong signals emanating from the equity market. One salesman noted that most sectors are 1 basis point to 2 basis points wider.

There are no new issues on the burner at the present time.

Just to make the point of the extent of the rally in credit this year, I offer a couple of bonds as examples.

Long time readers will recall that I chronicled ad nauseam the plight of an American Express 5year note which was issued in August 2008 as the financial markets spiraled into a near collapse. When the bond was issued ( and I do not have the level at which it came) it priced over 100 basis points cheap to outstanding Amex paper.

At the height of the crisis last winter that bond traded regularly in the 600s and 7800s versus benchmark Treasuries. The widest quote I ever observed was 825/775.

Five year Amex paper trades in the mid 150s today.

Second example. last week Harley Davidson sold $ 500 million 5 years at T+ 363 basis points.

In February this year they sold $ 600 million 5 year notes with a 15 percent coupon.

Posted in Uncategorized | 5 Comments »

MBS

Mortgages are 1 basis point to 1 1/2 basis points tighter to swaps.

There has been some bank buying of the 15 year sector. The buying has been by small and medium sized banks.

The Bullard comments about extending the MBS QE have not had a strong result thus far.

One trader in an email suggested that while it would be appropriate for the Fed to keep its options open, he did not think that they would extend the purchase program unless the economy began to form a W

Posted in Uncategorized | 1 Comment »