Fixed Income Recap

Treasuries rebounded, after selling off the past two days. The curve flattened by about 8 basis points in Tuesday’s trading as yields on the longer end of the curve remain much more volatile than the shorter. A basis point represents .01%.

As I’ve said before, supply concerns are in a battle with Fed buying expectations right now. On the days when large Treasury auction announcements dominate the news, supply worries takeover, and investors become concerned with Treasuries finding a bid. On days when it appears as though the Fed is going to continue its trend of keeping rates as low as possible, investors try to ride the wave of increased demand for Treasuries. Bond prices move inversely to yields.

The Fed will announce its target rate for Fed Funds tomorrow, which currently sits at a range of 0% - .25%, the lowest in history. The market expects the rate to remain unchanged but will listen closely to the comments that accompany the rate announcement tomorrow.

Fannie and Freddie
The two Government Sponsored Entities, who were taken into conservatorship in September of 2008, have begun to draw on the $200 billion of aid that was pledged to them by the Treasury. Freddie Mac is asking for $30 to $35 billion in new capital, on top of the $13.8 billion they received last November, and Fannie Mae is now making their first request of $11 to $16 billion. In addition, the FHFA, is proposing new rules that would trim the retained portfolios of Fannie and Freddie to $250 billion each. They currently sit at $782 billion and $804 billion respectively.

Moves such as this are moving the GSEs more towards the business practices they were initially created for, their guarantee portfolio. During the housing boom of 2003-2006 Fannie and Freddie became large buyers of non-conforming loans, both as a result of their desire to increase earnings and regulation that urged them to help previously unqualified buyers purchase homes.

The market isn’t showing any worry about the solvency of Fannie or Freddie as a result of these capital infusions. Credit spreads on longer senior debt of the agencies that still only carries the implied backing of the U.S. Government, as opposed to shorter debt that has an explicit guarantee, remains unaffected. And the Fed continues to take on more and more securitized agency MBS, as those spreads continue to tighten.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst