Fixed Income Recap

Agencies and Mortgages Tighten
Yields on Agency debt has tightened dramatically to comparable Treasuries due to recent direct buying by the Federal Reserve Bank of New York. Two-year Agencies are currently at 89 basis points over Treasuries, compared to 120 basis points this time last week.

The Fed has announced they will be buying benchmark Fannie, Freddie and Federal Home Loan Bank issues ranging in maturities from 2012 to 2017. Despite only buying the middle part of the yield curve, spreads have tightened across all maturities, in anticipation of more buying in the future.

MBS has followed agencies by tightening to Treasuries over the past week, again as a result of a buying plan announced by The New York Fed. The Fed has yet to announce specific issues that they plan to buy, but most signs point to fixed rate 30-year MBS pools.

As year end approaches, dealers are avoiding adding to their inventories, leaving the street with little to offer buyers. As a result, bids on odd-lots have continued to deteriorate, beyond what we saw last month, and show no sign of improving before year end.

TARP Money for Autos
The Bush administration announced this afternoon that it is considering tapping into the unused cash from the Troubled Asset Relief Program to rescue GM and Chrysler. The initial plan to allocate $14 billion in money directly from the Treasury failed to pass Congress Thursday night. It seems unclear why TARP money would be easier to allocate than the plan that failed to pass, because the TARP money would also need Congressional approval. Perhaps putting a different label on the same thing is enough to woo decision makers.


Cliff J. Reynolds Jr.
Junior Analyst