Fixed Income Recap

Treasuries
Treasury prices are getting attacked on multiple fronts. The first being Bernanke’s comments over the weekend that he believes the recession will probably end this year, which is killing the flight to quality trade. Secondly, the market is questioning the Treasuries’ ability to tap foreign investors. This is being complicated by Washington accusing China of manipulating their currency (Secretary Geithner needs to be careful with regards to this). Lastly, comments from the FOMC are leading many to believe that the Fed may be content with 5% on the conventional 30-year fixed rate mortgage, instead of the previously rumored 4.5%. The Fed hasn’t released any formal target; I am just talking about broad speculation. The rate currently sits at 5.09% according to bankrate.com.

The two-year finished down 2/32, and the ten-year was lower by about a half of a point. The benchmark curve steepened by about 3 basis points on the day. A basis point represents .01%.

MBS
Agencies tightened to comparable Treasuries by 18 to 22 basis points today depending on the coupon, with higher coupons outperforming the rest. There was a very large Fed purchase operation that went off today, the bulk of which was $2.149 billion in the old FNMA five-year benchmark. Although this was an agency debenture purchase operation, not MBS, the news, coupled with the Fed’s anti-Treasury purchasing rhetoric really lit a fire under MBS today. Today’s movement essentially erased all of last week’s spread widening. It’s almost funny what a little government meddling can do to volatility.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst