I can’t be sure if it’s an artifact of what I sometimes call the “mosaic mind” or truly unusual, but today I noticed something I don’t think I’ve seen in all my years of watching the yield curve.
It also seems to show again the heavy gravitational attraction of “round numbers.” After the jump, I’ll post a picture of the Bloomberg screen most long-time bond pros watch to see “the market.”
Sometimes there are genuine economic forces at work that push markets toward round numbers. Most easily seen are the prices of stocks, commodities or even indices on option expiration day. If there is enough open interest in those options, the final bit of trading tends to push the price of the underlying to the point where huge numbers of options (both puts and calls) expire worthless.
Since people also gravitate toward buying options on round numbers (and/or the series themselves are struck at round numbers), it would make sense that the market makers would have incentive to settle the trading exactly at a strike price like 40 or 50, or whatever.
With interest rates, we do seem to have some psychological barriers around the whole interest rate (and half point interest rate) intervals, but those “targets” for rates generally trigger buying or selling by participants who essentially say to themselves “If this thing gets up to 5% yield, I’m going to want some of it.”, or, on the bull side, “If some fool is willing to buy this thing to yield only 2%, I’m going to tattoo the bid and find something with a little more juice in it to own.”
Then there’s the influence of the year-end soon upon us, and the fact that most portfolios are well and truly finished with 2009. That would tell me that it won’t take nearly as much action to push rates up or down this week than it would any other week.
Having said all that, here’s the picture I was looking at today when it occurred to me that rates were uncannily spread by roughly 50 basis point steps along the entire range of the yield curve, and also surprisingly close to the whole or half percent yields.
For those that don’t know which yield curve I’m referring to, it’s the third column in, with the header SWAP MID. Notice anything? Except for the 2-year at 1.40%, every point on the curve is very close to a 50 basis point “round number”, and the regularity of the steps from one benchmark maturity to the next is really quite surprising.
While we still pay lip service to Treasuries as the benchmark, reality is that almost every bond trade or bank loan today prices relative to swaps.
But like I say, this could be my pattern-recognition playing games. Consider this an open thread — are there any other bond pros that think it’s odd that we are ending the year with the swap curve so darn close to 1.5%, 2%, 2.5%, 3%, 3.5%, 4%, and 4.5% from two’s to thirty’s?