Fixed Income Recap

Treasuries were down solidly all day on strength in equities that continued to get stronger as the day wore on outside of a brief selloff right after the stress test guidelines were released. The two-year finished down 3/64, and the ten-year was higher by 35/64. The benchmark curve was 4 basis points steeper on the day, and currently sits at +203 basis points. A basis point represents .01%.

We breached the 200 bps mark on the 2 to 10 spread today for the first time since March third as the long end of the curve continues to underperform at the top of this range in yields. The ten-year broke through 3% for a brief second just after 2pm central, but couldn’t hold on. The supply coming next week will test the 3.05% resistance, a level that has held in there well so far this year. Even if the auctions go well, I would expect a test of this level if we get any sort or rally in stocks.

Stress Test Guidelines Revealed
The Federal Reserve provided the market with some insight into the guidelines that are being used to stress test every bank holding company with more than $100 billion in assets. Here are a few bullet points on what was released today.

Banks are being asked to provide estimated losses on loans, investments and trading operations for 2009 and 2010 under two hypothetical economic environments.

• The baseline scenario projects real GDP growth of -2% in 2009 and +2.1% in 2010, unemployment of 8.4% and 8.8%, and home value declines of 14% and 4%.


• The adverse scenario projects real GDP growth of -3.3% in 2009 and +.5% in 2010, unemployment of 8.9% and 10.3% and home value declines of 22% and 7%.


• Under the above scenarios the Fed will concentrate on liquidity and capital ratios based on projections for losses provided by the banks being assessed.


• The Fed did not release any specifics on what a good test result might look like but did say that it will not be a simple pass/fail system. Although much of the market is expecting the banks to be divided into winners and losers.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst