Rate volatility continued yesterday as yields rose to their highest point in three weeks. The two-year closed above 1% for the first time since July 1, but still far from the recent high of 1.4% on June 8. The curve continues to steepen on higher than anticipated inflation numbers. The 2/10 spread closed yesterday at 259 bps, the steepest it has been since the second week of June.
CPI for June came in at +.7% MoM, a little higher than the +.6% expected, and was dominated by energy (+7.6%) which explains the meager +.1% MoM ex food & energy number. TIPS have enjoyed the past few days. Nominal coupon Treasuries are down 2 points compared to just ¼ of a point for TIPS, translating into higher breakeven yields.
New developments in the CIT saga are pointing toward a bankruptcy filing for the lender soon. According to CIT’s website “it has been advised that there is no appreciable likelihood of additional government support being provided over the near term.”
The market seems alright with letting CIT fail, stock futures are up premarket, but I’m afraid it may be for the wrong reasons. “Let them fail, their business model is broken”, many are saying. Was AIG’s business model not broken? What about Bear Stearns’? CIT has failed to convince regulators that their failure would pose systemic risk to the financial system. Maybe they hired some former Lehman employees to debate on their behalf because they failed to do the same and look where that got us. I agree that Lehman’s bankruptcy was worlds larger than CIT’s would be, but the market is pricing its impact as if the credit market is some well oiled machine. Maybe I’m hanging on to what happened last fall too tight but what happens if CIT’s large CDS counterparties begin to disclose their exposure and we get a another run on the banks? Just because CIT is smaller than Lehman does not mean that it can’t snowball into something much larger.
Cliff J. Reynolds Jr., Investment Analyst
CPI for June came in at +.7% MoM, a little higher than the +.6% expected, and was dominated by energy (+7.6%) which explains the meager +.1% MoM ex food & energy number. TIPS have enjoyed the past few days. Nominal coupon Treasuries are down 2 points compared to just ¼ of a point for TIPS, translating into higher breakeven yields.
New developments in the CIT saga are pointing toward a bankruptcy filing for the lender soon. According to CIT’s website “it has been advised that there is no appreciable likelihood of additional government support being provided over the near term.”
The market seems alright with letting CIT fail, stock futures are up premarket, but I’m afraid it may be for the wrong reasons. “Let them fail, their business model is broken”, many are saying. Was AIG’s business model not broken? What about Bear Stearns’? CIT has failed to convince regulators that their failure would pose systemic risk to the financial system. Maybe they hired some former Lehman employees to debate on their behalf because they failed to do the same and look where that got us. I agree that Lehman’s bankruptcy was worlds larger than CIT’s would be, but the market is pricing its impact as if the credit market is some well oiled machine. Maybe I’m hanging on to what happened last fall too tight but what happens if CIT’s large CDS counterparties begin to disclose their exposure and we get a another run on the banks? Just because CIT is smaller than Lehman does not mean that it can’t snowball into something much larger.
Cliff J. Reynolds Jr., Investment Analyst
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