Fixed Income Recap

Treasuries continued the volatility from last week and completely erased the gains from the last two trading sessions. The two-year finished down 2/32, and the ten-year was lower by 1 47/64. The benchmark curve steepened by 18 basis points, to end the day at +272 bps. A basis point represents .01%.

The graph below shows the rate volatility continued from last week.

The market is clearly disjointed. Fears that the US Treasury is going to lose its AAA credit rating push yields 30 bps higher one day, while rumors of more quantitative easing from the Federal Reserve bring them right back down the next. The market won’t be able to establish a true equilibrium until we can gain a better understanding of what the Fed is thinking. Rates have moved higher across the board since the Fed first announced the security purchasing program, and they are less than half way done. If the Fed sees the rate spike as a sign of economic health, then they are less likely to increase their purchase commitments. However, if Bernanke & Co. feels the need to further subsidize borrowing in order to avert a deepening recession, they is more quantitative easing on the way.

Have a great evening.

Cliff J. Reynolds Jr., Junior Analyst