The name's bond...

[yoganmahew]

…agency ten year bond.
acrossthecurve.com/?p=2132

…the agency market today … is undergoing an historic meltdown of its own. (I should sponsor a contest in which the winner supplies me with a synonym for meltdown which I am overusing…)…

acrossthecurve.com/?p=2131

Yields on speculative-grade corporate bonds surpassed 20 percent for the first time in at least two decades as a declining economy increased the risk of default

acrossthecurve.com/?p=2130

The corporate bond market had experienced a renaissance or revival of sorts over the last several weeks. The implosion in the CMBS market as well as the persistent weakness in the equity market has drained that sanguine attitude and substituted the melancholic mindset which had prevailed previously.

acrossthecurve.com/?p=2129

The implosion of the CMBS market continues today. AAA tranches of the CMBX are 100 basis points wider. Cash bonds are 200 basis points wider…at currents levels they are Libor + 1200 which is somewhere north of 14 percent.

One participant citing that yield level noted that sales at these levels can only be motivated by fear and panic.

[CaveCanem]

and a big wave out to anglo

[yoganmahew]

Hmmm.
uk.finance.yahoo.com/q/bc?s=^IRX&t=3m
3-month US treasuries head back to zero. The flight to safety ain’t over by a long shot.

[baby_tooth]

i’ve been saying it for the last two years…everything is going to fall, every single thing.

Been short the market for a long time and long Bunds and treasuries…

And i still believe that this is only starting, we are still on the downward slope.

Dow will hit 7k, maybe even lower, but i’m closing my shorts out there. USD/Eur will reverse and dollar will drop.

You can arb the spreads on Euro Bonds right now, playing the credit risk vs the cds market…nice carry on that.

But, corp bonds, cmbs, mbs, acs, everything to drop…equities still haven’t priced in the recession…

But bond bond bonds, spreads are amazing, TED is huge and confidence is all but gone…

[CaveCanem]

My earlier post here might have been a bit short.

I view Anglo as a Commercial Mortgage bank. If AAA CMBS is Libor +12%, then (in theory) investing in Anglo you’d get the whole book (AAA, mezz and Below). In effect, your capital injection is on the Below bit. Private equity would be very very expensive.

[yoganmahew]

acrossthecurve.com/?p=2148

There have been stunning and dramatic moves in the market since wrote my earlier piece. The Long Bond is trading at a yield of 3.43 percent and the dollar price has exploded 9 points today. I have done this for nearly 30 years. I have never witnessed this before. Even more incredible is the 30 year swap spread and swap rate. The 30 year swap rate is 2.84. It has dropped about 80 basis points on the day and is about 60 basis points rich to the 30 year Treasury.I just spoke with an options trader about this historic move. He said that there structured product trades buried in trading books all over the world which are melting. There is a massive short in the 30 year sector (in Treasury paper and in the swap market) which resulted from sales of cheap volatility. Some of these positions have been on the books of various entities for years and it is only recently that the chickens have come home to roost. Each time the spread turns more negative, that movement forces some one to receive in swaps to hedge there position. There are short the long end trades in every permutation and combination along the curve. The receiving creates a self fulfilling prophecy which compels someone else to receive. He had no opinion on when this would end.

The 10 year note is trading at 2.997. That is an historic low yield,too.

Here is a late run for the history books. The 2year note yields 98 basis points. The 3 year note yields 1.17 percent. The 5 year note yields 1.88 percent. I have given you the 10 year note and the bond yields 3.44 percent.

Someone told me earlier that I order to earn 10 basis points on a T bill you had to move to April.

The breakeven spread on 10 year TIPS is about zero. The market is predicting no inflation for 10 years.

Mortgages underperformed swaps by nearly 1 ½ points.

Here is a final swap run. The 2 year spread narrowed 2 basis points to 101 ¼ and the 5 year spread narrowed 4 ¼ basis points to 91 ¾. The 10 year spread narrowed 12 ¼ basis points to 13 ¼ and the 30 year spread inverted 26 ¾ basis points to 59 ¾ basis points.

I don’t understand the swaps bit, but it sounds awfully derivative-not-coping-with-Black-Swan-event like. Given the size of the bond market, this could be awful.

The TIPS bit shows the incredible flight to safety in my view. I simply cannot believe that there will be ZERO inflation over a ten year period.

[bungaloid]

reuters.com/article/bondsNew … 0320081119

Long dated swaps are used by insurers/pensions to hedge their long dated liabilities - 30y or 40y. That has been
the dominant flow in the long end of swap markets for years.

Long dated swaptions* are highly convex - as the market rallies dealers find that
they have become short the long end. All the the banks need to receive fixed at the same time to hedge this risk.
Result: swaps rates collapse and the spread to government bonds is irrelevant in the short-term.

Implied inflation from linkers (or TIPs in us) is extracted by comparing TIPs and treasury yield curves. Flight to quality affects
both curves equally so I don’t agree low implied inflation is about flight to quality.

Deflation is death to the same insurers/pensions with long dated liabilities because their unhedged liabilities grow in real terms in a
deflation scenario. They are the guys who are buying and it shows you how scared of deflation they really are.

• e.g. client has right to receive fixed at X% pay floating for 30y in 10y time. The price depends on the markets view of 30y vol in 10y time.

[yoganmahew]

Thanks bungaloid.

So anyone who buys long-dated bonds as a store of capital for long-term liabilities (pension funds and insurers) also buys swaps of some sort to ensure that they get a minimum yield? In effect they are derivatives that provide them insurance against their inability at some future date to get the yield they require?

Also thanks for the update on TIPS - that is scary news.

[baby_tooth]

it really depends on what kind of risk they want to run.

Alot of companies want to run a spread risk, and as such will enter asset swap packages. They hope, that the credit risk of thier asset remains the same, the value increase slightly and they have the market risk hedged out by swapping the fixed rate for Libor plus a spread…

This is your simple delta risk or interest rate risk.

Alot of bonds have a callable nature, and as rates drop, and expectations of rates drop, the bonds become more liley to be called and re-financed…introducing convexivity. This element is magnified the further you go out the yield curve as sensitivity increases. Increased sensi’s drive the risk further up or down depending on your position.

So, once, wehre you thought you were hedged you now find that vega (convexivity) has pushed you into a short position that increases your exposure. Of course you can try and hedge this out at this time but thats very costly, and its pretty much too late by then.

Alot of these situations are arrising from callable bonds, swaptions and so on. Also, as the dude mentioned there are an absolute shit-load of different type of CMS coupon bearing bonds out there. Alot of these are paying zip…I don’t have numbers to hand but i did read somewhere that there are almost 600 billion in funky bonds floating around…yielding zip.

alot of the FI market is massively dislocated at the moment, hence these crazy situations…and its a time like these, when you are at extreme movements you see the other greeks coming into play…

Oh to be an option trader right now, brown pants time…but amazing if you on the right side of things…

[yoganmahew]

Nicole Elliott from Mizhuo gives an analysis of US treasuries in a particular style:
cnbc.com/id/15840232?video=938964876

[yoganmahew]

money.cnn.com/2008/11/26/markets … /index.htm
(Courtesy of SomeAssemblyRequired)

1st time ever: 10-year yield is below 3%
Government debt prices jump as mortgage rates fall and economic outlook remains dark.
By Ben Rooney, CNNMoney.com staff writer
Last Updated: November 26, 2008: 5:23 PM ET
NEW YORK (CNNMoney.com) – Demand for U.S. Treasury bonds surged Wednesday, lowering the yield on the benchmark note to an all-time low, as investors responded to grim economic data and falling mortgage rates.

The closely watched 10-year note rose 1-3/32 to 106-18/32, and its yield fell to 2.99% from late Tuesday’s 3.10%. The yield on this note has never gone below 3% in its 46-year history.

[CaveCanem]

The table below shows generic spreads for a selection of ABS. Although very little is being traded, there’s very little demand. There is absolutely no way of funding mortgages (or any other debt) via securitisation without government intervention. Imagine passing these spreads on to borrowers

Spreads (bps)		AAA 		AAA 			AA 		AA 			A 		A 			BBB		BBB
						Oct'07	Nov'08		Oct'07	Nov'08		Oct'07	Nov'08		Oct'07	Nov'08
UK RMBS 				26		400			60		650			110		1500			175			2000
Spanish RMBS  		55		500			110		1100			180		2000			350		2500
BtL RMBS   		   70		1000			130		1600			180		2100			300		3000
Nonconform RMBS 	90		1200			150		1600			250		2100			400		3000
CMBS   				55		1000			100		1500			170		2000			250		2500
CC     				60		600			150		1000			220		1500			350		2000
Lease  				40		450				90	1000			150		1500			225		2000
SME    				65		750				150		1500		250		2000		400		2500

Data taken from 22Oct07 and 28Nov08. Note that by Oct 07 Spreads had already started to widen. Spreads continued to widen during Nov08

[lord_vader]

now i am not too well up and dont really understand any of the swaps and financial instruments out there to hedge risk (i presume?). But how in gods name is buying US T Bills a flight to safety considering the world has more t bills than toilet paper?

*Demand for U.S. Treasury bonds surged Wednesday, lowering the yield on the benchmark note to an all-time low, as investors responded to grim economic data and falling mortgage rates.

The closely watched 10-year note rose 1-3/32 to 106-18/32, and its yield fell to 2.99% from late Tuesday’s 3.10%. The yield on this note has never gone below 3% in its 46-year history.*

considering the deficits the US has, the debt, the bailouts, losing wars everywhere, this is fryingpan/into the fire panic. reminds me of dougal on the plane and pressing the red button

maybe this is whats driving down gold today? looks like a golden opportunity to buy gold

[lord_vader]

this is class

youtube.com/watch?v=ynoT-S5kk5w

[Double_edged_sword]

@lord vader

this is class

youtube.com/watch?v=ynoT-S5kk5w

Hank Paulson - AKA financial terrorist

[yoganmahew]

calculatedrisk.blogspot.com/2008 … rates.html

Form Bloomberg: Treasury Bills Trade at Negative Rates as Haven Demand Surges (hat tip Justin)

Treasuries rose, pushing rates on the three-month bill negative for the first time ... The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.

My guess is the banks are parking the TARP money in short term treasuries - and that has pushed the yield to zero. The flight to treasuries is across all durations: the Ten year is now yielding 2.67% and the thirty year treasury just over 3.0%.

[baby_tooth]

alot of this is just the rush over the turn…y.end and all that…

[yoganmahew]

@baby_tooth

alot of this is just the rush over the turn…y.end and all that…

Might be time to move out of bonds and just into cash!

edit: maybe not just yet:
acrossthecurve.com/?p=2268

December is always a month with bill demand as the process of sanitizing balance sheets for year end examination is always a concern. With the trials and tribulations in the financial markets this year that demand will be orders of magnitude larger than normal.
One last point, which a veteran salesman and former portfolio manager, made to me is that the money raised by financial institutions via the FDIC bonds is exacerbating the situation. The borrowers do not need that money now. They are defeasing maturities which will arise in 2009. So that money will sit in the short market until it is needed next year.

(emphasis added)

[ixus]

From FTAlphaville:

Treasuries bubble danger
Posted by Izabella Kaminska on Dec 10 10:25

As noted, the flight to safety is taking on epic proportions. With that in mind our thoughts are going to what may happen next, or specifically, the implications of a Treasuries bubble. Here’s one view from Monument Securities (our emphasis): More…

Though a Treasuries bubble might appear unproblematic, however, its bursting could turn out to be more dangerous than the collapse of any other kind of bubble. If confidence eventually returned to other markets, investors would shun the low yields on Treasuries. The Fed would then face the choice of monetising most or all of the Treasuries market, as funds fled to higher-return investments, or else of allowing Treasuries yields to race higher. Because foreign holdings represent a significant proportion of the stock of Treasuries outstanding, a collapse in Treasuries prices might soon be reflected in a collapse of the US dollar, with the accompanying threat of hyper-inflation in the USA and depression elsewhere. At that point, many investors might wish they still enjoyed the comparative calm of the ‘credit crunch’.

Hmmmm, not good.

[What_Goes_Up]

irishtimes.com/newspaper/fin … 62822.html

German bond issue struggles

INVESTORS SHUNNED one of the most liquid and safest assets in the world yesterday as a German bond auction came close to failing in a warning sign for governments attempting to raise record amounts of debt to boost their slowing economies.

The auction of two-year bonds saw only just enough bids to meet the €7 billion the government wanted to raise. Although a number of German bond auctions have failed this year, it was almost unheard of before the credit crisis, with the last failure before then in July 2000 following the dotcom meltdown.

Meyrick Chapman, strategist at UBS, said: “When a German bond auction struggles, you know there are problems. This is a sign demand among investors is already waning for government bonds because of the huge supply.” Other analysts say the fact Germany could sell at historically low interest rates, or yields, suggests the market is in reasonable shape as investors still bought in because of deflation fears and market uncertainty. It is also the year-end, when many banks and investors close their books.