Fixed Income Recap

Treasuries
The two-year finished the day up 1/16, and the ten-year was higher by 7/64. The benchmark curve was unchanged on the day, and remains at +198 bps. A basis point represents .01%. Treasury prices traded within a tight range throughout the day but ended higher on the weakness in equities.

$5.7 billion of ten-year Treasury inflation-protected securities were auctioned today with a bid to cover ratio of 2.25 and a real yield of 1.589%. TIPS are purchased with a fixed coupon that pays interest on a principal amount that is adjusted every month for inflation.

The Fed will buy 1-2 year Treasuries tomorrow.

FDIC Expansion
If the Public-Private Investment Program (PPIP) ever gets off the ground, and that is still a pretty big “if”, the FDIC may begin to look a lot like Fannie and Freddie. The FDIC is being summoned by the Treasury to provide guarantees for the leverage used in the PPIP; a situation similar to Fannie Mae and Freddie Mac being used by the government to absorb the risk that private investment is currently shedding in the housing market. A PPIP refresher.

Sheila Bair, chairwoman of the FDIC, was quoted in Monday’s NY Times estimating “Zero risk for insuring the PPIP.” That’s an interesting viewpoint considering that they are providing non-recourse leverage for the purchase of securities collateralized with auto and credit card loans on a 6-to-1 debt to equity basis while splitting the profits down the middle with the private investor. “Zero risk”? Not exactly the words I would use to describe such a plan.

As if the risks (sans reward) associated with the government’s involvement in PPIP aren’t alarming enough, it’s difficult to listen to the person at the helm of it all flat out denying any risk. Mispricing of risk (think Angelo Mozilo), and in some cases flat out denial of it (think Jimmy Cayne), are at the heart of the credit crisis. It’s astonishing to me that decision makers still believe that wishing risk away is the answer.

The deadline for private institutions to apply for participation in the PPIP was extended yesterday to April 24th and many are speculating the Treasury is struggling to find participants. This is thanks in large part to a change in FASB guidance on mark-to-market accounting that makes the program much less effective. Maybe the Chairwoman was referring to the program never really coming to fruition when she described the FDIC’s commitment as “zero risk”.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst