More problems in the bond market! : LUSENET : TimeBomb 2000 (Y2000) : One Thread

For educational/research purposes only!


NEW YORK, Feb 8 (Reuters) - The price of the U.S. Treasury 30-year bond rose by more than a point on Tuesday as renewed concerns about the future supply of the bond prompted strong buying.

There's a perceived shortage in the future and we're trading on that," said Chris Rupkey, vice president and financial economist at Bank of Tokyo-Mitsubishi Ltd in New York.

"Just when you think the 10-year to 30-year spread is going to stabilize around 28-30 basis points, it blows out again," he said.

Prices of 30-year bonds surged last week after the Treasury outlined its plans to cut issuance and buy back longer maturity debt. The price movement has led to massive position adjustment by market players who were betting that bonds would underperform as strong economic growth prompted further interest rate tightening.

The 30-year bond yield, which moves in the opposite direction to its price, is now lower than yields on 10-, five- and two-year notes. Longer-dated debt usually yields more to compensate investors for the risk of inflation.

The bond outperformance of the rest of the yield curve washelped up by a stronger-than-expected rise in fourth quarter 1999 productivity data to 5.0 percent, traders said.

The bond rose 1-4/32 to 98-8/32 to yield 6.26 percent.




Click on Market Snapshot to find the story.

-- Farouk Madjurian (, February 08, 2000


Can you say "Short Squeeze"?

-- Teague Harper (, February 08, 2000.

Can someone explain what a short squeeze is? TIA

-- (, February 08, 2000.

A short squeeze is when investors seel bonds that they do not own, that is called going "short the bonds". If you were "long the bonds" you would own the bonds and have them in "inventory". When you short a stock or a bond you take a risk that you must "cover the position", or buy the stock or bond back to "close the position". So, if you "short the bond"(sell what you don't own) at 100.00 (and receive $100) and the bond's price falls to 99.00 you would buy the bond back at 99.00 (pay $99.0) and pocket the $1 dollar as profit. Sounds fool proof except for the prospect of the forecast of the bonds price. To make a risky investment riskier most sell short on margin and use the $100 dollars as collateral and buy $1,000 in bonds and a move up in price will wipe out all profits and the original $100 or even more. Thus the basis of selling short and a short squeeze, there are more sellers of a bond than there is a bond and they must cover the sale. "More dollars chasing the same amount of goods makes the price go up and forces more to cover their short and so forth and so on...Hope it was helpful, I do this sort of stuff on a large scale for a living. ---Anon

-- Anon (Anon@work2, February 08, 2000.

...and a move up in price will wipe out all profits and the original $100 or even more. Thus the basis of selling short and a short squeeze...

EXCELLENTexplanation - Anon! And that is why there were a flurry of stories last week about the horrific problems short sellers were facing last week because of the run-up in the price of the Treasury's 30-year bond. Believe me, there are many BIG players deeply involved in this short-squeeze, and probably some huge Hedge funds also.

-- Farouk Madjurian (, February 08, 2000.

Nicely done, Anon. Many thanks for a very succinct explanation of "shorting" and its risks.

We can expect more rumors of troubles in a "big fund" or two as the current volatility in the credit markets continues. Some of those trader's models must be going nuts right about now.

-- DeeEmBee (, February 08, 2000.

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