Fixed Income Weekly

Bond traders sat on their hands for most of the week, waiting for two big news releases, the prepayment speeds for Freddie MBS last night, and the jobs report this morning. For the week the curve was slightly flatter, falling 1 bp to 279 basis points 2s to 10s. Credit tightened after being flat last week, mostly on today’s positive news. Markit’s current CDS index stands at 85.6, 9 points higher than the multi-year lows set in January. CDS is quoted as the cost of default insurance, so the lower the better.

The curve actually sat much flatter before the heavy selling on the long end after this morning’s jobs report, which showed business cut 36,000 payroll positions, better than the 68,000 expected. The labor participation rate ticked up slightly from 64.7% to 64.8% and the unemployment rate held steady at 9.687%. The big story leading up to the release was that severe weather was going to put the hurt on the data. The effect of things like this is impossible to accurately measure, but the market was ready to see a terrible number, and ignore it, but instead we saw a better than expected number, and stocks rallied like a Subaru.

Prepayment speeds are usually a non-event, but Freddie Mac purchased every loan that was at least 120 days delinquent from their mortgage pools in February, so March FHLMC speeds were expected to skyrocket. Freddie MBS underperformed Treasurys in early trading, but buyers stepped in to prove the selloff was a little unjustified considering overall speeds may actually slow down going forward due to the cleanup. Fannie Mae is expected to follow Freddie’s lead in the next few months, but will buy only “a substantial portion” of their 120+ delinquent loans. Fannie Mae is considered to have more problems compared to Freddie, but although Thursday’s release gives some insight into what will come, it by no means answers the market’s questions on what is to come with FNMA.


Have a good weekend.

Cliff J. Reynolds Jr., Investment Analyst