Fixed Income Recap

Treasuries rallied slightly as the flight to quality trade still thrives with the short end of the curve leading the way. Yield on the 2 year reached 1.15% intraday, the lowest seen since June 2003. The yield curve remains steep as the 2-10 year spread closed today at 249 basis points.

As retailers continue to report terrible earnings forecasts the bonds backed by loans for strip malls and other retail locations continue to suffer. Dealers dealing with such product reported “Worse day ever” type movement for today. These are AAA rated Super Senior traunches dropping 3-4 points on the day. Proof that ratings mean nothing in the current environment as the fixed income world is being turned upside down before our very eyes.

It seems that the Treasury comes out with a new way to tackle our woes daily, and today was no exception. The Treasury announced a revision to the original TARP plan of buying bad assets from financial institutions and will spring forward with a plan to use the entire $700 billion to directly inject capital.

As it stands now the Treasury has only $60 billion left from its first slug of funding and will have to turn to the next administration to implement its new plan.

Regardless of how you look at it this is the government setting prices artificially. Whether it’s setting prices for assets that no one else will buy or setting rates of return on preferred stock investments in companies that can’t raise capital in the open market. As bad as it sounds it may be our best option.

In my opinion, the use of the new capital is the main obstacle ahead. If the health of these companies can be improved enough to attract private sources of funding, improving their situations even more, it may help the nasty case of deleveraging plaguing the market.


Cliff J. Reynolds Jr.
Junior Analyst