Fixed Income Recap

Treasuries
Treasuries sold off today, not quite reversing the huge rally from last week. The 2 and 10 year treasuries closed the day yielding about 1.2% and 3.32% respectively.

MBS
Freddie Mac surprised most of the market when it reported a $26.7 billion increase in their retained portfolio for October. This was the second biggest one month increase year to date and the biggest since May. I expect Fannie to report a similar number later this week.

MBS spreads over Treasuries widened throughout October despite the heavy buying by the agencies. This is further evidence that demand for even agency MBS continues to suffer.

The concerns about MBS are more than the lingering credit concerns surrounding Fannie Mae and Freddie Mac, but a general desire by investors to avoid all MBS. Even Ginnie Mae securities, which have the full faith and credit of the US Government, are also at historically wide spreads to treasuries. The lack of broad interest in MBS has caused liquidity to suffer making it difficult to enter and exit the market efficiently.

FDIC Corporate Bond Guarantee
Goldman Sachs announced today that they will be the first to issue corporate debt under the insurance program provided by the FDIC. Under this program, some corporations, mostly banks, are allowed to issue corporate debt, with maturities between 31 days and three years. The FDIC will insure the bond, protecting the investor in case of default, for a fee of about 1% per year which is paid by the issuer.

Pricing has yet to be announced for this three year issue, but speculation around the market leaves many to expect yields around that of agency debt. Fannie and Freddie debt currently trades around 160 basis points over treasuries.

Cliff J. Reynolds
Jr.Junior Analyst