Acropolis Investment Management

The two-year finished flat on the day, and the ten-year was lower by 1/64. The benchmark curve was unchanged on the day, and currently sits at +219 basis points. A basis point represents .01%.

The Fed submitted bids to buy 22 different Treasury notes as was only successful in buying $6.9 billion of one issue. On a normal day, news like this would roil the market for Treasuries. But help from a well bid Treasury ten-year auction and stress test results, it was largely ignored.

The Treasury auctioned $22 billion in new ten-year notes with a bid/cover of 2.47 and yield of 3.19%. Primary dealers in the US dominated the auction for the second time in a row as the indirect bid, foreign investors and central banks, fell to 18.7% from 31.9% in the previous ten-year auction.

Stress Test Results

Although the stress tests aren’t due to be officially released until tomorrow, results are being leaked left and right. Here is what we know as of Wednesday afternoon.

Bank of America, who needs $34 billion, leads the pack. According to most analyst SunTrust needs some but no numbers have been disclosed, the Treasury told Regions they will definitely need some but wouldn’t give them an amount, and Citigroup needed $10 billion this morning but now only needs $5 billion and thinks KeyCorp will need some. Confused yet?

This is such a mess. In addition to the results being leaked left and right and private analysts being confused with anonymous Treasury sources, there is nothing new about these capital needs. Every one of these companies, with the exception of Met Life, has received a preferred stock investment from the government through TARP. The government has simply switched their preference from preferred equity to common equity, and will officially disclose common equity needs tomorrow ignoring what the company may have already received through TARP.

Bank of America for example received $45 billion in preferred equity from the government. The $34 billion listed in the table ignores that number, and only means that the government would require B of A to convert $34 billion of government’s preferred stake to common equity to satisfy the regulators “ratio du jour” - Tangible Common Equity. Tangible Common Equity is more stringent than traditional capital measures and places a premium on common equity over preferred. “We think we are fine, but it’s now out of our hands,” Bank of America CEO Ken Lewis said at the company’s annual meeting last week. I think that pretty much sums it up.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst