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Thursday, July 9, 2009

Fixed Income Recap


If you never had a reason to check the blog out before you surely do now. Minjung made her first post yesterday. Check it out!! WAG raises dividend 22%

The Treasury rally ran right through yesterday’s ten year auction as rumors that foreign central banks may step back from the longer auctions never materialized. I know the table has all the details but some parts deserve highlighting. The impressive outperformance of the long end despite the ten-year supply led to a 9 basis point curve flattening that was the biggest move flatter since June 5. One must begin to think about mortgage rates dipping again. The last time the ten-year was at 3.30% the 30-year fixed was 4.81%, (currently 5.34%). The market can definitely take the origination, thanks to the Fed averaging over $4BB in MBS purchases each day, so it seems like many of the pieces are in place for rates to move closer to their lows from this spring. The ten-year however, is probably going to need to hold a sub-3.50% level for more than just a few days in order to lower mortgage rates and with this volatility calling that would be impossible.

The $19 billion ten-year auction was “out of this world strong” with a bid/cover of 3.28 much higher than the 2.72 four auction average. After announcing that they would sell $19BB in ten-year notes the Treasury received $62.4BB in bids!! Who’s thinking the dollar is junk now? That is some strong demand, and the fact that it came 3.5 basis points tighter than the market right before the auction also bodes very well for supply concerns into the future.

Some are calling the recent demand for Treasuries simply part of the negative repo dynamic in the market currently. I won’t get into the technicals of the problem but it is resulting from a new rule implemented by SIFMA that forces participants who are failing to deliver a Treasury security to their counterparty in a trade to pay penalties. It is creating more demand for the securities than their previously was because before May of this year there was no explicit cost of failing. This is an interesting dynamic, but to say it is a major contributor to the recent Treasury rally is going a little far in my view.


Cliff J. Reynolds Jr., Investment Analyst

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