Fixed Income Recap

With the record large auctions of last week behind the market, Treasuries traded higher Monday as buying was dominated by foreign accounts. The two-year was up 3/32 of a point in price while the ten-year traded higher by just more than a point. The benchmark curve flattened by 6 basis points on the day. A basis point represents .01%.

TLGP Update
$145 billion has been issued to date under the FDIC insured corporate debt program. Demand for the issues has improved significantly since the program was implemented. Current issues are trading about 30 basis points, or .30% over Treasuries.

The FDIC announced last week that it was considering extending the term of the program to cover newly issued debt maturing in ten years. It was indicated that the program for insuring longer debt would differ from the existing program. The debt would need to be collateralized, perhaps in a way similar to a covered bond, and the issuer would have to prove the money was being used to support consumer lending. The current program covers debt maturing as late as June 2012 and has no such stipulations.

Last Thursday, in the face of this announcement, Goldman Sachs issued $2 billion in ten-year debt without any guarantee from the FDIC. The issue came in at 7.5%, or 500 basis points over the ten-year Treasury.

Current FDIC insured corporates are trading right on top of agency debt. Ten-year Fannie and Freddie debentures currently trade around 3.6%, considerably more than the 7.5% that Goldman will be paying on their newly issued bonds. However, credit spreads are much tighter than they were last fall, and as Goldman exhibited, along with several others who issued a total of $8 billion in longer term deals last Thursday, the market does not need the subsidization.

In my opinion, the FDIC should make bank deposit insurance their top priority. The original Term Liquidity Guaranty Program helped resuscitate the credit markets that seized up after the collapse of Lehman Brothers, and the assistance proved to be very effective. However, the current environment does not warrant further assistance from the government in this form, especially not at the expense of the depository base.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst