The Fed isn’t having a good afternoon. Their plan to hold interest rates low is being undone by forces yet unknown. The 5 year Treasury auction went well this afternoon. The Treasury sold $35 billion worth of 5-year bonds, there was good participation, and all was calm. About an hour after that auction Treasury prices began falling…and MBS prices were falling too…at an even faster rate than Treasuries…this is an unusual thing. The 10 year pulled back at a very rapid pace until it was down over a full point.
I picture Bernanke and Geithner in an office staring blankly at a Bloomberg as they realize that they’ve spent hundreds of billions of dollars on MBS and Treasury securities over the last few months and they currently losing their shorts on those positions. I would guess that it is difficult even for the Ivy League economics professor to maintain his cool in the face of it. If it were me I can imagine the Bloomberg terminal being verbally and physically abused over the remainder of the day.
There is no specific news yet on what is driving today’s pullback. It’s not a gigantic move in Treasuries but it is material and it was unexpected. You can always gauge the magnitude of the surprise factor by the pace of the chatter going “over the box” as we call it (we have a worldwide intercom system that allows us to maintain real-time communication with the rest of the firm). The chatter picked up after the 10-year dropped by over the half a point, and as it approached a one-point loss the there were people scrambling and talking over each other in a rapid-fire staccato trying to get things done before the situation deteriorated any further. A one-point move on the 10-year Treasury generally doesn’t raise too much of an alarm in a market where we’ve seen record volatility (think back to the nine-point intra-day move we had late last year). So while the magnitude of this afternoons movement isn’t even close to being a record it is having a chilling effect on the market due to the surprise factor.
The general trend in rising Treasury yields appears to be coming from an uneasiness in the market regarding the Treasuries ability to place as much debt as they need to bring. Supply may simply overwhelm demand.
If you were looking to sell bonds you’ll be looking at much lower prices today as Treasury prices fell AND spreads widened (mainly on MBS). If you were looking to buy bonds then today is probably a very nice day to do so. I can’t imagine the Fed and Treasury just throwing their hands up and saying “there’s nothing more we can do”. It wouldn’t surprise me to see them up the size of their buyback plan from their current $300 billion amount to something much more material. If you can buy on a pullback before the Fed counter-attacks you may have an opportunity to pick up some spread.
Below are two screens showing today’s Treasury market activity and the movement in the yield curve over the last month.
If there is anything I can be doing for you just let me know.
Posts
No comments:
Post a Comment