Bond Expert: Friday Wrap

Started by CrackSmokeRepublican, October 17, 2008, 11:28:51 PM

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CrackSmokeRepublican

Bond Expert: Friday Wrap
by: John Jansen October 17, 2008 | about stocks: AXP / GE / TLO    


Prices of Treasury coupon securities exhibited some rather bifurcated price action and the belly of the curve was the beneficiary. The yield on the benchmark 2 year note was unchanged at 1.61 percent. The yield on the 5 year note dropped 2 basis points to 2.82 percent. The yield on the 10 year Treasury slipped 3 basis points to 3.92 percent. The Long Bond was the sacrificial lamb and saw its yield increase by 5 basis points to 4.31 percent.

The 2 year/10 year spread flattened by 3 basis points to 231 basis points.

The 2 year/5 year/30 year butterfly richened to 28 basis points from 19 basis points yesterday.

Why the 5 basis point jump in the yield on the Long Bond? The Long Bond has been a superstar lately and has outperformed numerous other instruments. One trader thought that some of those trades were being unwound today.  :shock:

The street was also rife with rumors that the Treasury would float an ad hoc Long Bond either today on Monday. This transaction would be similar to the reopenings in the 7 year sector last week which created an imbroglio in that sector. The rumor is somewhat preposterous as the Treasury will bring a 30 year as part of the refunding early in November.

And battered as the Long Bond was, the bond contract took an even deeper hit. This probably reflects more deleveraging via margin calls, collateral disputes or redemptions.

The market remains highly illiquid. Here is an anecdote to graphically make the point. Someone had an order from a customer today to buy $100 million of the old bond which matures in February 2036. In order to fill that order the spread between that issue and the Long Bond moved fully one point. Before this long episode began a trade such as that would not move spreads more than 1 or 2 ticks. Often times the trade could be done in one transaction on one ticket.

That is no longer the case and it is still very difficult to trade size without an order.

Separately, the repo situation has not improved markedly in spite of the shift in sentiment in other short term market sectors. There are about 20 issues failing, most of which are in 2013 and 2014. It will probably take more reopenings to alleviate the pressure.

There is also a Catch 22 in this regard which results from central bank policies. Many central banks have strict rules on fails and since they do not wish to be involved in fails many have pulled there securities from the repo market which serves to exacerbate the problem.

Central banks have been active sellers of the 0 to 3 year sector in agencies as well as various Treasuries across the curve. The conventional wisdom holds that the substantial selling was to satisfy domestic needs.

Next week the Treasury will announce new 2 year notes and new 5 year notes. There are estimates that they will bring $35 billion 2 years and $25 billion 5 years. The refunding auctions are right on the heels of those auctions. So there will be more than ample reason for the street to work the offered side of the market.

Agency, Swaps and Mortgages

Agency spreads were unchanged today versus Treasury paper. One trader noted that the market remains lethargic and is likely to stay that way until someone in authority offers some clarity on the issue of the less robust guarantee that the GSEs have when that guarantee is compared to the explicit backing that FDIC provides for banks in this brave new financial world.

Swap spreads gapped tighter today. Spreads in the 2 year sector  are tighter by 13 1/2 basis points, spreads in the 5 year sector have improved by 8 basis points and 10 year sector spreads have narrowed 4 basis points.

Mortgages improved about 2 basis points to the Treasury curve amidst light flows. Dollar rolls came off as Libor slipped, too.

Corporate bonds

The mood in the corporate bond market underwent the same transformation which has occurred in the money market sector. One veteran salesman and friend of the blog reported that his firm was observing inquiry from end users in the 6 year and 7 year sector. The curve is steep between 5s and 10s and the steepness of the curve makes that sector which trades off the 10 attractive.He said that buyers wanted 10mm to 20 million blocks of A and BBB paper.

He noted that it has been a very long time since they had seen that type of quality buying. In his opinion, if the funding markets cooperate, it is possible that a ton of cash will jump off the sidelines and spend some money next week.

The American Express 5 year bond I follow is at a record wide as it is quoted 750/725.

The General Electric 10 year is 445/420.
http://seekingalpha.com/article/100520- ... urce=yahoo
After the Revolution of 1905, the Czar had prudently prepared for further outbreaks by transferring some $400 million in cash to the New York banks, Chase, National City, Guaranty Trust, J.P.Morgan Co., and Hanover Trust. In 1914, these same banks bought the controlling number of shares in the newly organized Federal Reserve Bank of New York, paying for the stock with the Czar\'s sequestered funds. In November 1917,  Red Guards drove a truck to the Imperial Bank and removed the Romanoff gold and jewels. The gold was later shipped directly to Kuhn, Loeb Co. in New York.-- Curse of Canaan

CrackSmokeRepublican

GE is going Bankrupt... pretty clear from the looks of things... now that might shock the true believers in an F***d J*WAMERICA...

-----

GE meets lowered bar with 22% profit fall
By Matt Andrejczak & Steve Goldstein, MarketWatch

SAN FRANCISCO (MarketWatch) -- General Electric on Friday met the lowered bar that it set for itself by reporting a 22% third-quarter profit fall, as problems at the group's finance arm more than offset profit increases at its energy infrastructure and cable media units.
Chart of GE

The Fairfield, Conn., industrial bellwether's net income fell to $4.31 billion, or 43 cents a share, down from $5.5 billion, or 54 cents a share, a year ago. Revenue rose 11% to $47.23 billion.
Operating profit at GE Capital -- the conglomerate's biggest by revenue -- dropped 33% to $2 billion, as the finance unit boosted its loan-loss provisions. Profit at its consumer and industrial segment, which GE is exploring strategic options for, plunged 82%.

GE's energy infrastructure business posted a 31% jump in profit and NBC Universal generated a 10% profit increase, its eighth straight quarter of growth.
GE (GE:
General Electric Company
News, chart, profile, more
 Last: 19.63-0.26-1.31%
4:00pm 10/17/2008

GE 19.63, -0.26, -1.3%) closed at $21.50, up 13%.
From continuing operations, GE earned 45 cents a share, in line with the view of 43 cents to 48 cents a share it established in late September. Analysts polled by FactSet had expected earnings of 46 cents a share on revenue of $47.71 billion.
GE said infrastructure-order growth was 9%, below the "above 10%" view it had targeted.
The company said it's on track for 2008 earnings around $20 billion.
But according to Citigroup analyst Jeffrey Sprague, "it appears quality will be lower than expected. This raises further questions about the strength of 2009 earnings and headwinds that will to be overcome if issues such as tax rate begin to normalize and provisions continue higher."
Sprague said in a research note GE Capital posted a negative tax rate of 29%, helping to pad GE's bottom line by 5 cents a share.
The global credit crunch has taken a toll on GE, considered a barometer for the global economy, since it has businesses that make a range of goods from light bulbs to aircraft engines. It also lends money to finance everything from commercial real-estate projects to purchases of industrial equipment.
Last week GE raised $12.2 billion through a stock offering to help shore up its balance sheet and protect itself from the freeze in the short-term commercial-paper markets. The company also got a $3 billion infusion from Warren Buffett's Berkshire Hathaway. (BRKA:
berkshire hathaway inc del cl a

Matt Andrejczak is a reporter for MarketWatch in San Francisco.
Steve Goldstein is MarketWatch's London bureau chief.

http://www.marketwatch.com/news/story/g ... aspx?guid={17975D85-06AA-4FF7-9C78-D6F64FCE3638}
After the Revolution of 1905, the Czar had prudently prepared for further outbreaks by transferring some $400 million in cash to the New York banks, Chase, National City, Guaranty Trust, J.P.Morgan Co., and Hanover Trust. In 1914, these same banks bought the controlling number of shares in the newly organized Federal Reserve Bank of New York, paying for the stock with the Czar\'s sequestered funds. In November 1917,  Red Guards drove a truck to the Imperial Bank and removed the Romanoff gold and jewels. The gold was later shipped directly to Kuhn, Loeb Co. in New York.-- Curse of Canaan

CrackSmokeRepublican

Glimpsing a Return to Normal
by: John Jansen October 17, 2008    
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The money markets of which I have often written here are undergoing a process of rehabilitation and repair. My correspondent in this sector has begun to see a small wave of investor money flowing into the Commercial paper market. He said that beginning late yesterday he has seen three large trades in the one month to two month sectors in which the investor bought between $500 million and $1billion blocks.He says the investors are large and savvy and are sitting atop a pile of cash.

He noted that one week Libor has declined dramatically this week with the rate dropping 50 basis points on the 14th, 25 basis points on the 15th,38 basis points on the 16th and 29 basis points on the 17th (today).

That significant decline has caused a pronounced steepening of the money market curve and in his phrasing "unless a comet strikes the Fed's headquarters in DC" the steeper curve will force investors out the curve to garner some yield.

While I was on the phone with him an investor came in to buy $40 million of two week CP. He demonstrated an anecdotal point. The issuer marked the price up by 25 basis points and the investor purchased anyway. He noted that would have been unheard of just one week ago.

So he suggests that the operational significance of the huge pool of dollars flooding Europe and the States should not be underestimated and that it does appear that sentiment is slowly and subtly shifting to Warren Harding's bastardization of the language in which he proclaimed a return to normalcy (rather than normality).

http://seekingalpha.com/article/100482- ... -to-normal
After the Revolution of 1905, the Czar had prudently prepared for further outbreaks by transferring some $400 million in cash to the New York banks, Chase, National City, Guaranty Trust, J.P.Morgan Co., and Hanover Trust. In 1914, these same banks bought the controlling number of shares in the newly organized Federal Reserve Bank of New York, paying for the stock with the Czar\'s sequestered funds. In November 1917,  Red Guards drove a truck to the Imperial Bank and removed the Romanoff gold and jewels. The gold was later shipped directly to Kuhn, Loeb Co. in New York.-- Curse of Canaan