Fixed Income Recap

Treasuries
The two-year finished the day down 9/64, and the ten-year was lower by 49/64 on strength in the stock market (S&P +2.87%). The benchmark curve was 3 basis points steeper on the day, and remains at +187 bps. A basis point represents .01%.

FASB Releases New Mark-to-Market Guidance
The Financial Accounting Standards Board revised the rules associated with how financial institutions must value certain “difficult to price” assets. The new rules give institutions the opportunity to price some assets based more on their own judgment rather than relying on prices from fire sale transactions.

Banks have been writing this stuff down pretty extensively now and this rule change doesn’t reverse any of the losses taken to date. However, fears of more write-downs have haunted investors for the past 18 months and profitability and regulatory capital ratios stand to look much better in the future thanks to this ruling.

Treasury Purchases by the Fed
The Fed purchased $7.5 billion in 4-6 year Treasury notes today. The Fed will purchase 10-17 year notes on Monday and 1-2 year notes on Wednesday of next week.

FDIC Insured Corporate Bonds
The FDIC’s Temporary Liquidity Guarantee Program (TLGP) was extended to December of 2012, (the previous limit was June of 2012). In addition to the term extension, an increase in fees will begin in June of this year in an attempt to dissuade borrowers from using the program while recapitalizing the FDIC’s reserves. The original fee of 100 basis points annually will be increased 25 basis points for debt maturing by June of 2012 and 50 basis points for debt maturing after that. For non-bank entities like GE Capital the fee increases will be larger.

I’m not sure if the fee increase will really deter any bank from issuing debt under the program. Even considering the fee increase, issuing debt under the TLGP program is still vastly cheaper than issuing debt without the FDIC’s guarantee. About $350 billion dollars worth of debt has been issued under the program to date, while program participants have brought only 2 non-TLGP issues to market over the same period. Goldman, B of A and Citi are going to continue to take advantage of this program as long as it remains cost effective.

Have a great evening.

Cliff J. Reynolds Jr.
Junior Analyst