Fixed Income Recap

The benchmark curve steepness, usually measured by the difference in yield of the 2 year and 10 year Treasuries, reached 250 basis points for the first time since January 2004. Steeper yield curves have historically forecasted improving economic conditions in the past, but the validity of that correlation could be questioned this time around. Especially given the current state of the bond market overall and the current funding needs of the Treasury. These are things we will have to monitor closely.

Fannie Mae, who still has yet to receive a cent of help from the Treasury, reported a loss of $29 billion, or $13 a share today. The company said today that it may fall to negative net worth before the end of the year and the $100 billion facility established by the Treasury may not be enough. Delinquencies on their book of business did increase this month over last, but most of the losses resulted from a decreasing of a very large deferred tax asset that they have had on their books for years. Tax assets are only held at a significant value if they are expected to be realized in the foreseeable future through taxable profits, which doesn’t look likely to happen.

The treasury auction this morning was met with great demand driving treasury prices down and yields up. But yet again we saw them rally back as stocks lost their steam going into the afternoon, causing the curve to shift down about 8 basis points. We will wait to see if the thin balance sheets of dealers have the appetite for the 10 and 30 year auctions later this week.

The bond market is closed tomorrow in observance of Veterans Day.


Cliff J. Reynolds Jr.
Junior Analyst