Fixed Income Recap

Treasuries traded wildly today as the curve steepened 7 basis points to +166 basis points. The 2-year ended the day yielding .705% and the 10-year sold off three-quarters of a point to yield 2.38%. The 30-year, traded as low as 127.5 around 8:30 a.m., before rallying back to 130. This volatility in the Treasury market depicts investor’s true uncertainty towards risk

Mortgages
Mortgages underperformed Treasuries today, with 30-year MBS widening out about 6 basis points to the benchmark curve.

The story with mortgages continues to be the same. Reports of banks beginning to see activity in the refi market is most likely contributing to the underperformance of mortgages. Very few in the market are anticipating a refi boom like that of 2003, but even if we see just a small fraction of that activity, mortgages will behave very differently in 2009.

Fannie and Freddie
Herbert Allison, the CEO of Fannie Mae, was quoted in this morning’s Wall Street Journal as saying, "We're not out to maximize profits… We want to promote responsible homeownership.” These are dangerous words coming from the Chief Executive of a publically traded company. A sign that full nationalization doesn’t seem too far off.

The new surcharges introduced by Fannie and Freddie in 2008 in order to cushion losses taken on non-conforming loans they purchased have now been retracted, in favor of further subsidizing home ownership through artificially lower costs.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst