Fixed Income Recap

Treasuries
Treasuries began the day down in reaction to stocks beginning the day on a higher note. Stocks were up about 1% at the open, continuing the rally from yesterday. They remained down as the rally in stocks faded just before noon only to rally hard into the afternoon after the well received ten-year auction.

Today’s ten-year reopening came in at 3.04%, after trading over 3% most of the morning. The market liked the news and the yield dropped 14 basis points in the half of hour of trading after the auction. In bonds, prices move inversely to yields.

The two-year finished up only 1/32 while the ten-year was higher by about 15/16 of a point. The benchmark curve flattened by 10 basis points on the day. A basis point represents .01%.

Back end (i.e. longer dated issues) supply continues tomorrow as $11 billion in thirty-year treasury bonds come to market. It appears the market has this supply concern a little overdone. The two auctions this week have thrown the market for a loop and each bond has rallied hard after the new supply. Look for further flattening if the same goes for tomorrow’s auction.

MBS
Agency mortgage backed securities spreads remain very tight. The Fed is about $100 billion into its $500 billion agency MBS buying program and has given some thought to increasing the number if they don’t get the desired effect. Rates on 30-year fixed rate conforming loans remain around 5.15%, which is down from the beginning of the buying spree, but has plateaued at these levels. Some of this can be attributed to pressure on Treasury yields, which have risen since the beginning of the year on supply concerns. The Fed is also considering entering the Treasury market as a buyer, referred to as quantitative easing, to indirectly bring mortgage rates down further.

Tomorrow we will get the Fed agency MBS purchases report for the past week.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst