Treasuries were up all day despite jostling in equities. Swine flu concerns over the weekend drove international money toward the safety of US government debt, ignoring what has the potential to be an ugly week due to increased Treasury supply. The two-year finished up 5/32, and the ten-year was higher by 22/32. The benchmark curve was unchanged on the day, and currently sits at +203 basis points. A basis point represents .01%.
The Treasury sold $40 billion in 2-year notes at a .949% yield with a bid/cover ratio of 2.72. Tuesday and Wednesday will bring another $61 billion in 5- and 7-year notes and analyst are expecting $200 billion in new supply next week as the Treasury does its monthly refunding. Today’s rally would have been substantially bigger if it were not for the looming supply. Poor performance in one of the auctions this week could send 10-year yields up past 3.05%, something the Fed does not want to see.
TED Spread Added to Table
The TED Spread, which is used as a proxy for liquidity in financial markets, is the difference between 3-month Libor and the yield on 3-month T-bills. The London Interbank Offered Rate (LIBOR) is the rate that banks charge for loans they make to other banks. As credit risks become more of a concern, banks charge more for these loans in order to be compensated for the increased risk of not being repaid. At the same time, as investors become more concerned with credit risk, they flee to the safety of Treasury bills, driving risk-free rates down. The result of 3-month Libor rising and yields on T-bills falling is an increase in the TED Spread.
The Treasury sold $40 billion in 2-year notes at a .949% yield with a bid/cover ratio of 2.72. Tuesday and Wednesday will bring another $61 billion in 5- and 7-year notes and analyst are expecting $200 billion in new supply next week as the Treasury does its monthly refunding. Today’s rally would have been substantially bigger if it were not for the looming supply. Poor performance in one of the auctions this week could send 10-year yields up past 3.05%, something the Fed does not want to see.
TED Spread Added to Table
The TED Spread, which is used as a proxy for liquidity in financial markets, is the difference between 3-month Libor and the yield on 3-month T-bills. The London Interbank Offered Rate (LIBOR) is the rate that banks charge for loans they make to other banks. As credit risks become more of a concern, banks charge more for these loans in order to be compensated for the increased risk of not being repaid. At the same time, as investors become more concerned with credit risk, they flee to the safety of Treasury bills, driving risk-free rates down. The result of 3-month Libor rising and yields on T-bills falling is an increase in the TED Spread.
The top half of the graph shows 3-month Libor (orange line) and 3-month bills (white line) individually, while the bottom part shows the TED spread.
The graph details the substantial change in the credit environment due to the Lehman bankruptcy last fall. Three-month Libor rose from just under 3% to 4.81%, signifying the reluctance of banks to lend to each other. T-bills saw a more abrupt change, dropping from 1.47% on 9/12 (the Friday before Monday 9/15) to .06% just two days after Lehman filed Chapter 11.
The TED Spread has recovered to more normal levels as credit markets begin to show signs of life, thanks to trillions in government purchases and guarantees that have brought liquidity back to the market. Although the current level of 95 bps is still double the long-term average, the fed has certainly made its presence felt.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
The graph details the substantial change in the credit environment due to the Lehman bankruptcy last fall. Three-month Libor rose from just under 3% to 4.81%, signifying the reluctance of banks to lend to each other. T-bills saw a more abrupt change, dropping from 1.47% on 9/12 (the Friday before Monday 9/15) to .06% just two days after Lehman filed Chapter 11.
The TED Spread has recovered to more normal levels as credit markets begin to show signs of life, thanks to trillions in government purchases and guarantees that have brought liquidity back to the market. Although the current level of 95 bps is still double the long-term average, the fed has certainly made its presence felt.
Have a great evening.
Cliff J. Reynolds Jr., Junior Analyst
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