Fixed Income Recap

There is no table for today because I am doing a major overhaul of the way I present the info. It will be worth the wait.

Freddie Mac announced earnings this morning as it continues to move in lockstep with its counterpart Fannie Mae. Freddie Mac reported a $25.3 billion loss for the 3rd quarter, or $19.44 a share, on increased writedowns of assets and increased reserves for bad loans. Taking Fannie’s remarks a step further, Freddie is now asking for an injection of $13.8 billion from the Treasury and is also hinting that the previous number of $100 billion may not be enough.

With the increased writedowns plaguing Fannie and Freddie and talk of even larger injections being needed in the future, we continue to see agency MBS spreads tighten. This tells us that although the future of Fannie and Freddie as standalone entities appears dismal, the street isn’t reflecting any concerns about the credit in prices. In fact they are reflecting the opposite. Agency MBS has tightened in to Ginnie Mae, full faith and credit, MBS in past week. A widening of the spread between the two would show concern.

The yield curve steepened to 262 basis points Thursday before settling down 10 basis points to 252 basis points today.

The theory that steeper yield curves foster business expansion is supported by the historical data. We currently have the 3rd steepest yield curve since 1977. The second highest peak in July 1992 of 268 basis points preceded the great bull market of the 90’s. And the highest peak in August 2003 of 274 basis points appeared right at the beginning of the longest streak of double digit corporate earnings growth for S&P 500 companies in the post WWII era (20 Quarters). I thank Brent for that last bit of info.

The yield curve’s shape is not pure technical charting hullabaloo. The shape tells us something about what investors expect interest rates to be in the future. Economic growth is traditionally followed by higher interest rates to curb inflation. Hence, the longer end of the curve is bid to higher yields in order for investors to be compensated not only for the risk of holding a longer term asset, but the fear that rising inflation will eat away at their principle.

This is one piece of good data. One must consider the countless other things that will weigh on future growth including government policy.


Cliff J. Reynolds Jr.
Junior Analyst