T-Bond trading comment (August 28, 2007)

Another summer day passed by and is now gone. Liquidity is coming back slowly to the market but with the roll week, the long week-end coming and school starting soon there still is some liquidty issues... Although, liquidity is getting better. We arrived this morning at the office, with a slight bid in the market as State Street was rumoured to be in trouble on ABCP holdings... The market started to fly upward before falling back again. This fall was a bit dubious since the rest of the market was holding its ground. The most probable answer to this behavior is people putting on more steepners... Other answers are possible ( like future inflation higher, big sellers of 30s, big deal getting priced) but I think a bit unlikely. After reaching the 111-10 line, the market stayed pat and waited for the stock market to open. The Dow opened on a weak note with added pressure on financials (following what was happening in Europe where big banks were getting hammered). In sympathy with the stock market and increased fear of a worsening of the current crisis, the whole debt market went up... After licking the high 111s, the market stabilized himself around 111-21 for the rest of the day.

Looking at how the TUs, FVs, TYs and USs moved today, it was pretty clear that people were putting steepners on again. Five and ten year notes were up more than half a buck while long bonds were lagging... If this is any indication of what the market is expecting for the future, I think it is pretty clear that traders are expecting that the credit/liquidity crisis is set to continue.

Talking about the crisis, it looks like more news are coming on the negative side. More specifically, housing data shows no sign of improvement, two years swap spread jacked up again today, Libors are ticking up and more money market funds are running into troubles. This could set the table for a prolonged crisis that in the worst case could lead to a recession... In addition to all this, credit indices (CDX and Itraxx) are drifting higher on low volumes.

Last item worth of noting for today was the Minutes of the August 7 meeting that were due at 14h00. The Fed didn't say anything unexpected. Basically, the Fed reiterated the balance between the actual credit crunch and possible inflation in the future. The only twist was that the Fed maybe shifted their focus a bit more toward the actual crisis. The Minutes put a bid in the market but with little conviction...