Acronymic Angst in the Bond Market and Elsewhere

There is carnage in the asset backed markets again. I am not well versed on this stuff but in cobbling together a story it is pretty ugly. So by way of example one derivative veteran noted that the last cash flow AAA pieces of the ABX Index have declined 14 points in the last month.The failure of the Administration to roll out the TARP has done major damage in the cash CMBS market. AAA paper in this market is trading swaps plus 1000 basis points. Investors in the sector did not load up the boat in anticipation of higher prices, but the anticipation of the Administration as White Knight did act to motivate some potential sellers to congregate on the sidelines. With the news that the White Knight will not arrive, many of those folks are now disengorging themselves of securities.

The CMBX index has widened 75 basis points today and has moved 250 basis points in the last 5 days. Market participants inform me that insurance companies are loaded to the gills with this stuff and are probably feeling quite uncomfortable.

Most of the participants felt that the pressure to unload this stuff would be unrelenting between now and year end, and it is likely that spreads will continue to widen.

Swaps and Agency Agony

Swap spreads are 4 basis points to 5 basis points across the curve except in the 10 year bucket which is only 3 basis points tighter. I had not watched the 30 year spread in a while but it is now NEGATIVE 23 ½ basis points. Agency spreads are suffering additional carnage. That sector is under additional heavy pressure today, as it has been since Mr. Paulson averred that he would not unroll the TARP. There is also investor frustration and angst at the just less than full faith and credit bear hug of the government for GSE debt. This is not horseshoes, so close does not count. The lack of the full-faith-and-credit embrace weighs on sentiment of foreigners who have shunned the sector.

One portfolio manager with whom I converse (and who is a faithful supporter of the blog) said that it appears to him that FNMA (FNM) and Freddie Mac (FRE) have become foreclosure mitigation vehicles and even the appearance of chasing profit seems to have been defenestrated. Each of the GSEs recently printed very large losses, and without more government backing, spreads will leak wider.

There is also a residue of pressure from the reopening from yesterday in the 3 year sector and the 5 year sector.

Two year spreads are about 5 basis points wider, 3 year spreads 7 basis points wider and 5 year spreads are about 10 basis points wider. Spreads in the 10 year sector are 7 basis points wider.

Comments

[dogsofmyhead:]

HI John, I have been reading your blog for the past several months and I love it. Since I'm a geek, I really appreciate your using defenestrate in a sentence! Keep up the good work.

2008 Nov 18 02:10 PM