5/4/09 US Bond Update

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5/4 Midday Bond Update

Good Morning!
Interesting action in the bond markets today, here's some quick notes/observations from the trenches:

30Y - Seeing the most action this morning, early in the morning we were higher, then back almost 1/2 handle lower from the previous day's levels. Currently the 30Y is leading the charge higher.

Sources note that the Fed is actively targeting buybacks in the 2016-2019 maturities, watch the 5/10 yr bonds for action. More than likely these buybacks will be targeting off-the run securities, so I expect any mess left by the Fed in terms of dislocations will begin to be cleaned up by relative value players in the space.

Agency Mortgage buyers stepping up their pace into the afternoon, we've seen mortgages catch a fairly good bid, however due to Tsy action, the basis has narrowed a bit. Indicative pricing @ 7.87 on my screens now.

The basis revival is continuing (or looks like it) with more people stepping up to the plate in purchasing Agency MBS's.

The curve is seeing flattening around midday. 2/30, 10/30, 5/30 and 5/10 all flatter across the board at this time.

4/28 Daily US Fixed Income Summary

4/28 Daily US FI Summary (PDF)

Apr. 28 Closing Notes

Interesting day in bond basis land, shortly after 1PM's 5Y bond auction we saw a lot of selling pressure on the long end of the curve. Hearing statements from various market participants that while the 5Y auction was "decent", many folks are trying to stay as nimble as possible into tomorrow's 7Y auction at the same time.

The basis for some major items I'm following at the moment was varied across the board. 2/30 basis (which we were short i.e. expecting a steepening in the spread) went from around 2-24 to 2-19 ish according to my notes. The 5/10 sector also saw basis narrowing, from 3-04 to 2-30 for around -0-06 change.

The biggest move on my radar screen is the US Agency Mortgage basis. Still long in the MBB and short TLT. Today's action saw that spread widen to around 6.39 (+1.36) or a one day gain around 26%.

There was mild selling in mortgages this morning, however the activity in that sector remained quiet. Spreads are narrowing pretty nicely in this sector. In the daily wrapup, refer to discussions about this narrowing.

Glancing at my notes, the last time we saw a major spike in daily returns in the mortgage basis, the next day has been followed by a significant retracement of the gains. Deducting a strategy from today's action, it would appear that we potentially have oversold in the Treasury space. Overnight, I'd watch for the Tsys to catch a bid. If you're in the futures arena, look for the 30Y Jun 09 to potentially rally from the 123 handle into 124's.

-c

XLF / 2Y Swap Correlation Trade Update

An update as of April 2009 for the XLF/2Y Swap Correlation trade initially proposed mid-2008 is posted here (PDF document).

April 2009 - Trading Strategy: MBB Basis

Mortgage Basis Trading Idea:
April 2009 MBB Basis Trade Idea (PDF)

As I have mentioned in previous idea sessions and research notes, gaining exposure to the US Mortgage sector this year could be a prime source of profits going forward as the US economy and in particular, demand for US MBS products begins to recover after the 2007-2008 slump. While many folks will not have the access required to take advantage of buying the underlying mortgages in the OTC markets, there exists one vehicle that allows for regular investors to gain exposure to this space...."

2/10/2009 Daily Recap

2/5/30 @ 70 bps.

2/30 at 256 bps, flatter on the day from around 261+ levels..

Saw classic flight to quality earlier in the day. Fed was not an active buyer (please don't comment on that, I am sick of hearing conspiracy theories).

Agencies
FNMA 3 07/12/10    1.203    21.0    -4.1
FHLMC 5.25 07/18/11    1.783    -7.9    +9.4


FHLMC 2011's now below 5Y yield around 1.86%

Success in buying up the 5Y agency mortgage sector by the Fed? it's remains to be seen.

I am flat in bonds. I may take a directional play overnight in 30Y, depends on how Europe opens.

12/24 Closing Run - 1PM ET

Bond Yields

2Y - 0.899%

5Y - 1.526%

10Y - 2.192%

30Y - 2.632%

Swap Rates

2Y - 1.579%

5Y - 2.172%

10Y - 2.555%

30Y - 2.722%

US Tsy Yield Spreads

2/5 - 62.7

2/10 - 129.3

2/30 - 173.3

5/10 - 66.6

5/30 - 110.6

10/30 - 44

US Swap Curve Spreads

2/5 - 59.3

2/10 - 97.6

2/30 - 114.3

5/10 - 38.3

5/30 - 55

10/30 - 16.7

Swap Spreads (vs. UST)

2Y: 68

5Y: 64.6

10Y: 36.3

30Y: 9.0 (Target +36, avg px. entry: -21)

Merry Christmas. Limited coverage on Friday 12/26

12-22 NY Close Price Run

2Y - 0.831
3Y - 1.158
5Y - 1.433
10Y - 2.172
30Y - 2.616

2/30 - 178.5
2/5 - 60.2
2/10 - 134.1
5/10 - 73.9
5/30 - 118.3
10/30 - 44.40

2Y Swp Sprd - 1.604, 77.3
5Y Swp Sprd - 2.183, 75
10Y Swp Sprd - 2.508, 33.6
30Y Swp Sprd - 2.624, 0.08

Bond Close Update - 11/26/08

Bond Close Update - 11/26/08

Swaps ended the day relatively wider across the board on light trading and an early close. Here's the closing levels for your reference. Nothing much noteworthy today with the exception of some Fed news, which I will cover later in a more comprehensive report out tomorrow recapping the fast-moving action that has taken place in the fixed income world in the past few weeks.

Swaps

2Y 101.2 +7.2
5Y 83.4 +0.8
10Y 19.4 +4.9
30Y -42.6 +4.6

Treasuries
2Y 1.107% -4.4

5Y 2.015% -5.9
10Y 2.987% -11
30Y 3.536% -9.9

US Agency Spreads

FNMA 2010 - 139.7 -1.2
FHLMC 2011 78.8 -2.2
FHLMC 2016 115.2 +4.2

MBS TBA's

FN 30 - 100-27+ -0-04, up 2-21 handles for the week with demand for the TBA securities contained from Fannie Mae at 5% coupon.

Bond futures saw increased bid back towards the highs of the week, with the USZ8 trading at 127-316 or +1-03 handles. It has been up this week a full +5-29 handles. TYZ8 traded at 122-1050 up +1-05 handles today, and cashing in a one week gain of +3-025 handles. FVZ8 traded at 118-226, ended the day higher by +0-06+. This week has seen an unprecedented move, up +1-015 handles for the week.

Have a happy holiday.

Cedrick Johnson

Morning Update - 11/26/08

Morning Update - 11/26/08

Swaps better across the board this morning, widening is the theme that we've seen across the entire swap curve. Here are the levels at 11AM NY time:

2Y 98.3 +4.3

5Y 83.1 +0.6

10Y 18.3 +3.8

30Y -41.1 +6.1

Treasuries across the curve getting slightly bid:

2Y 1.145% -0.6

5Y 2.054% -2.0

10Y 3.029% -6.8

30Y 3.586% -4.9

Relatively quiet day, so far.