Fixed Income Recap

A broad selloff in stocks led to a stronger bond market as the curve was pancaked flatter to 245.8 bps, 6 bps lower on the day. Rates have moved to their lowest point since the end of July, thanks in part to strong Treasury auctions last week, but primarily because of reversal in sentiment over the past 2 weeks or so.

A Treasury market fixated on stocks is a positive for a market that has been looking at every auction with a magnifying glass worried to death that US debt buyers are vanishing. So now that fundamentals are back as the main driver of the market – at least for now – volatility may have a chance to ease a bit. We’ll see how long it lasts.

TALF Extended
In a joint statement with the Treasury, The Federal Reserve announced the extension of the TALF program for newly issued Commercial Mortgage Backed Securities to June 30, 2010. The reason behind the switch is that CMBS deals typically take longer to originate than other TALF eligible collateral such as small business and credit card loans. This extension does not widen the scope of what is considered TALF eligible, although many think that residential mortgages are the logical next step. The Fed Agency MBS purchasing program has been effective at propping up the secondary market for securitized conventional mortgages, but the secondary market for prime jumbo, Alt-A and Sub-Prime mortgages continues to be very illiquid. The question Bernanke is asking himself is, “How much is too much?”

Cliff J. Reynolds Jr., Investment Analyst