As I mentioned, the primary purpose of the bond crash/course is to record my personal quest for a greater understanding of John Jansen’s daily commentary. I have added a new category to tag posts with specific efforts along these lines.

Let’s try one from today and see if we can apply what we have covered so far.

Vol is higher today as vol becomes very directional. The market has broken out of the recent range and that has brought demand from hedger. One salesman noted increased interest in low strike receivers. The three month/ten year ATM swaption straddle trades at 668.

Well, we are off to a bad start. Obviously I need to cover volatility eventually. (Do I really have to get my head around “three month/ten year ATM swaption straddles”?) For now, let’s just say that “Vol” is short for “Volatility”, and the market price of the aforementioned straddle represents the market’s expectation for the near-term volatility of a certain instrument. “Three month” is the near term, and “ten year” is the instrument. Jansen is saying that the market’s expectations for the volatility of the 10-year LIBOR swap rate over the next three months has gone up. “668” quantifies that volatility; I do not know the units.

More will have to wait until I learn enough to write a post on volatility. Let’s try the next paragraph:

Swap spreads are narrower across the curve. Convexity types continue to experience death by a thousand cuts and have been active receivers. They are receiving as the market completes a 45 basis point move.

Ah, now that is better. Never mind who the “convexity types” are, exactly; we will cover that eventually. For now, think of them as entities that need to hedge their interest rate risk by balancing their porfolio’s duration. But whoever the convexity types are, apparently they are getting hammered by the narrowing of swap spreads across the (yield) curve because they are “active receivers”.

Does that makes sense? Well, recall that the “receiver” of a swap receives a fixed rate in exchange for floating LIBOR. The “swap rate” is the fixed rate the market is offering, and the “swap spread” is the difference between the swap rate and comparable Treasury yields. So if swap spreads are narrowing, then the swap rate is declining relative to Treasuries. Treasury yields also declined today… So people who are receiving today are getting a much worse deal — i.e., much lower yield — than they could have had recently. 45 basis points worse, in fact. But they are receiving anyway because “convexity types” must adjust their hedges as interest rates move. This has been happening a lot lately, hence “death by a thousand cuts”. (Time to short FRE again?)

Moving right along…

Two year spreads are 2 1/4 basis points tighter at 37 1/2. Three year spreads have narrowed1 1/4 basis points to 49. Five year spreads are 3 1/4 basis points tighter at 36. Seven year spreads are 1 3/4 basis points tighter at 21 3/4. Ten year spreads are 3 1/4 basis points better at 20 3/4. Thirty year spreads are in the ether at NEGATIVE 18 1/4 and are 3 1/4 basis points tighter.

Piece of cake. These are the swap spreads; i.e., the difference between swap rates and Treasury yields at various points along the yield curve. What’s up with that NEGATIVE spread? Well, it’s “in the ether”, because negative spreads are (ahem) “impossible”. I will have more to say about that soon.


Mortgages are 2 ticks wider to swaps.

I guess I also need to cover Agencies and Agency MBS.

(Anybody know what “tick” means in this context? Is it a basis point, or 1/32 of a percent, or what?)

I think we have achieved comprehension of 50% or maybe more. Not too bad.

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