Fixed Income Recap

Treasuries
Treasuries started March in rally mode, benefitting from a pause in supply and a weak stock market. Bonds pulled back today, but yields are still down for the month. Bond prices move inversely to yields.

Treasuries struggled hard out of the gate, but rallied to recover most of their losses at the end of the day as stocks lost their momentum and ended the day in the red. The two-year finished down 1/16 of a point while the ten-year was lower by about 3/8 as the benchmark curve steepened by 1.5 basis points today but stands 3 basis points flatter for the week. A basis point represents .01%.

MBS
Mortgages outperformed Treasuries today, trading around unchanged as U.S. Government bonds were down. MBS widened yesterday but tightened back in today to remain about where they closed before the weekend. FNCL 5s (Fannie Mae 30 year 5% Pools) currently sit at 142 basis points over comparable Treasuries. Just 3 basis points higher than the low we hit on February 8th.

TALF
Today the Treasury announced adjustments to the Term Asset-Backed Securities Loan Facility. The terms were extended to include such things as CDOs collateralized by subprime credit card loans and auto leases. The government won’t be purchasing these assets from institutions, but giving them a loan for up to three years and requiring them to post these assets as collateral. The Treasury will use sizable haircuts, (some as high as 15%), in addition to backing from the Fed to the tune of $100 billion, (increased from $20 billion today), to try and insulate the taxpayer from loss.

These assets that will be used as collateral are not stable by any means. The posted assets could lose significant value in three years, and in the event of default, the Treasury will be left with only the collateral. If the assets have lost value beyond the level of the initial haircut the Fed backstop will kick in.

The Fed backstop is being funded with TARP money. This is the same TARP money that was initially intended to buy bad assets from the struggling banks and hold them indefinitely. There are approaching that model with this version of TALF, but I still don’t understand the Treasury’s disgust with the original TARP. They are putting the taxpayer at no less risk with this program, (they are stilled exposed to the performance of these assets), but they are limiting the benefits. If they just purchased these assets outright, they could leave the banks with the mindset to make valuable long term investments, instead of making them repay the loan in the three years.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst