11/30 Bond Market Close

Today was an interesting day in the bond markets, we saw a spat of buyers come in early, but now that trend has changed. The key yield level of 4% in 10's is holding into the bond close at 3.961 currently. Sellers in the 10's and 30's with the 10 recovering off the lows of the day a bit, but still in negative territory. 30's saw a bit of a bounce, but we're back down to near a full handle loss in 30's, with the yield at 4.397%.

Spread trading saw the curve in a steepening mode predominantly into the close, and our 2/10 and 2/30's are taking a bit of heat. Here's a summary:

• 2/10 93.20 +4.90


• 2/30 136.80 +7.50

Overall we've seen a gradual steepening to the curve today, with very volatile trading in the individual instruments. The key to watch in the bond afterhours is the 10Y yield, given some market chatter of a equity selloff in the last hour, but with limited participation in the markets, I don't see us breaking the key 4.0% level during the afterhours sessions.

Update

2/10's looking attractive for a flattener here, we've seen some steepening higher +3.40 to 91.70. I'm in at these levels for flattening, with target at 70-75, stp 102 given noted resistance at the 100bp level.

Midday Bond Market Update

Seeing sellers back across the curve, previously 2's and 3's were bid higher, now languishing around unchanged, with the 3's just bid by a tick higher, and the 2's turning negative.

Spreads have steepened on this move, while we're seeing a slight flattening in the 2/3's, the 3/30 has steepened out +6.80 to 138.40, while the 2/30 has steepened by +5.20 to 134.50. Tactical trade bias is still for flattening but we're taking some heat here and it's getting quite warm in the kitchen.

If equities continue to rise, the key level to watch in the 10 years is 4.00% yield, and we're trading at 3.998% now. Expect more selling to hit tens if we rally in equities.

Treasury Morning Notes & Observations

Well, the credit crisis is not over yet, and I've been extremely busy as of late to post to the blog here (as you can imagine). There's a few items of discussion that I want to talk about here this morning:

• 11/30 Morning Bond Market


• 2Y Swap

11/30 Morning Bond Market Summary

We started out the morning with most of the bond curve components steepening, albeit not at extreme levels. The 2/30 spread was flattening earlier in the session, it has since gone into steepening territory at 131.60 +2.30 in the cash markets. Nothing's really standing out right now, 30Y OTR's were trading down a full handle in the cash market earlier, but we've seen a bit of buying coming in as of late today. The 30Y as of this time is at 109-292 -0.26 or 4.396% yield, while the 10Y is trading at 3.988% yield.

Given the fact that this is the last trading day of November, and there's light participation from a few major dealers today, I'm not expecting much. I still maintain the flattening bias on the 2/30 [from 146, target 117]. I echo the sentiments by David Ader and his team at RBSGC that this market is extremely hard to trade outright given the volatility that has occurred, and most trades are going to be limited at most - and definitely I am watching out for the Dec 11 Federal Reserve meeting. If you want me to go out on a limb, I say we're in for a 50 bps cut at this meeting, and we could see an additional 25bps cut in the first meeting in 2008, given the fact that we're not out of the woods yet with respect to Mortgage ARMS and resets coming up in 2008 which has the potential to inflict more pain on an already battered sector.

2Y Swap

I noted to a colleague last week when the 2Y swaps were trading above 100 about the criticality of that moment. Swap spreads above 100 signal danger, and boy- danger was in the air with a declining stock market and another aftershock from August's "Big One". We've seen swap spreads across the curve come back down a bit, with the 2Y swap at 87, -2.50 so far today. Given a relatively calm market, I expect the 2Y swap spreads to settle around 75-80 going into the Fed meeting, but I wouldn't be surprised if we get some shocks which could drive them back into the mid 90's.

All in all, it has been quite a volatile time, but now we seem to be getting a respite in the bond markets. I can't say the same for equity derivatives, but at least I've got some breathing room now to make some strategic picks ahead of the Fed meeting and try to make short-term tactical trades in equity indices. I am steering away from the bond market for now - I like my sanity.

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