Treasury Market: Confounding the Nonbelievers

The treasury market is confounding the nonbelievers with a bit of a rally and a bit of a steepening trade. The treasury market is responding to some softness in the equity market and particularly to softness in financial stocks. Fannie Mae (FNM), Freddie Mac (FRE) and Lehman (LEH) each opened to strong gains but has since retreated. FNM and FRE are virtually unchanged and LEH is down 5 percent.

The one month bill has rallied by about 20 basis points this morning and earlier it was as much as 40 basis points lower. The 2year note is leading a curve steepening move which has 2 year/10 year about 5 basis points wider than it was at the open. The spread currently is around 140 basis points. Swap spreads were several basis points tighter at the start but are wider now. With the rally in the 2year treasury note 2 year swap spreads are wider by 4 ½ basis points. Spreads in the 5year and 10 year sector are wider by a basis point.

As I complete this a bill trader reports that the short bills are surrendering more of the gains they had achieved earlier. The reason is that the Treasury just announced that they will auction $34billion one month bills tomorrow.

Comments

[whidbey:]

The new bills issue was a surprise, but not unexpected. The offers of the GSE are what keeps everyone on edge. Who wants their equity when it is known holders will be stiffed if a shut down is needed to avoid government owership outright. This is classical government finance with Congress running loan policy and the agency hacks running the finances to pay the bills. It can not end well no matter what policy is selected. Credibility is the life blood of investment, and when its gone, its over.

2008 Jul 14 03:41 PM