Sign of the times
On the way in to work this morning I find myself sitting at a red light with an interesting view. On the corner across the street from me stood a guy in his mid-twenties with a goatee beard, a big ring piercing in his bottom lip, a sleeveless t-shirt, baggy jean shorts, tattoos galore…and he is marketing something. He is holding a big plastic arrow with an advertisement on it. Now THIS has my interest…who in the world would hire this guy as the “face man” for the company. This guy looks like he could easily be on one of those “most wanted” sheets you see at the post office…yet instead he’s here helping out with the marketing effort for a local business. Unless this ad is for a bail bonds place or a tattoo parlor I’m going to be very surprised.
When my light turns green I ease across the intersection and I see that the sign is telling me that his employer buys gold. Yep…in case you can’t find a place that will buy gold…you can sell it to this guy. At this point I try to envision a conversation where I come home and my wife tells me she made some cash by selling her gold rings. If I ask her where this commodities transaction took place and she told me “I found some dirt bag leaning up against a light pole at Poplar and Kirby and sold it to him” I’d have some real questions about the deal.
So I drive the rest of the way to work trying to figure out the economics of how and why someone is paying this particular spokesperson an hourly wage to stand on a corner and hold their advertisement. I never did get to a point where I could envision myself paying this guy $8 an hour to hold a sign with my name on it.
I’m hopeful that this is an inflection point for the economy. When you can run a business buying used gold in the retail market and your advertising “campaign” is built on paying shady looking folks to act as billboards…the economy CAN’T get much worse. Hopefully this is the low water mark and we start to improve from here.
The auction
The 30 year Treasury auction went off today and it was very strong. There is still plenty of demand for Uncle Sams IOU’s. The 30 year bond was up 5/8’s of a point immediately following the auction. The rest of the Treasury curve is flat to slightly lower on the day (prices lower).
The data
The economic data for today consisted of Initial and Continuing Jobless claims. Initial Claims were expected to come at -460k…the actual release was -462k.
Continuing Claims were expected to come out showing 4.5 million people still on the roles…the actual number was 4.55 million.
The data were close enough to the estimates that they’ve had no material impact on Treasury activity.
Tomorrow we get Retail Sales and University of Michigan Confidence.
“What is everyone buying?”
This is a question we get a lot. Bond activity among banks has been quite strong the last three weeks or so. The one thing I can say that happens regularly is that we get inquiries for 6 to 18 month paper…then when we relay what the yields are people recoil and ask for something further out on the curve. The yield curve is steep and short rates are exceptionally low. A small extension in maturity can bring a material improvement in yield at this point.
There are currently 147 basis points separating the 2 year Treasury and the 5 year Treasury. Most banks own a lot of 2 to 5 year paper so this part of the curve provides a nice example.
If you’re looking at 2 year Agency callable paper you’ll be looking at yields in the 1.15% range. It’s not beautiful but if it’s what you need then it is what it is. IF however you have a bit more flexibility you can extend out a bit and pick up 3.00% to 3.05% on 5 year callables…a 185 basis point pickup (or $18,500 in income per million invested).
So, on the 2 to 5 year portion of the Agency callable curve you have at least 190 basis points of yield to play with as you extend from 2 years out to 5 years. You can wring a little more yield out of things by buying continuous calls. You get more yield by selling more optionality…if your outlook is that rates are going up you pick up the extra yield of the continuous call without having to pay for it in the form of the bond actually being called away.
I guess that’s the long way of saying 2 to 5 year agency paper has been selling well.
Another very big hot spot on the curve is Agency Step-Ups in the 7 to 15 year range. The idea here is that you pick up an initial coupon in the 2.50% to 3.00% range, then look for an aggressive structure that lets your bond keep up if rates begin rising. Yields to the short call dates are way better than Fed Funds and yields on the longer dates are high enough that you can live with the bond if it extends.
A lot of this paper has traded over the last few months. The current steepness of the yield curve combined with a defensive mindset on the part of buyers has combined to make step-ups a very active sector.
MBS spreads are very tight. Trades here now require more looking on our part to find a “deal”. There is still plenty of activity in MBS…it just requires more legwork to find the right bond.
Signing off
That’s all for now…it’s Conference Tournament week, Memphis is losing to Houston right now and I can hardly think because George is yelling at the TV. I can tell from the tone in his voice and the look in his eyes that he really believes those players can hear him. He puts the “fan” in fanatic.
If you have any questions or if there is anything I can be doing for you just let me know.
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