Bond Expert: Early Wednesday Wrap

Includes: FMCC, FNMA
by: John Jansen

(I am writing this early because I have some business to attend to this afternoon. It is about 230PM as I begin to pen this and that is about an hour earlier than normal.)

Prices of Treasury coupon securities pushed higher today as financial concerns generated by the travails of Freddie Mac (FRE) and FNMA (FNM) dominate trading. There are other concerns about the wellbeing of the global economy and the wellbeing of the global financial system.

The day opened to an interesting dichotomy as stock prices were higher, as were bond prices. In my opinion the recovery in the equity market was quite feeble given the battering it took the last couple of days. The bounce resembled the famous trading room metaphor of a moribund feline striking the pavement after falling from high altitude. The late in the day retreat in the equity markets into negative territory is emblematic of the weakness which rightfully grips that market.

The GSEs, FNMA and Freddie Mac, have seen the decline in their share prices continue unabated. As I began to write this piece I took note of where each was trading and each was down an identical 28 percent. That is after the prodigious declines of the last several months.

The crisis of the agencies and the entire financial debacle operating under the rubric of subprime crisis brings to mind the great American novel by John Steinbeck, the Grapes of Wrath.

It is the story of the Joad family in Depression era America’s Dust Bowl. They leave their home in Oklahoma and seek a better life in California. The story is one of a continuing series of episodes of bitter failure and disappointment followed by a brief period of hope and elation. The story ends very sadly for the Joad family as circumstances and the system crush their hope and yearning for a better life.

That is the chronicle of the bond market this last year. It is one of bitter disappointments and crisis followed by brief periods of elation which end in another episode of crisis.

I think that as the FNMA/Freddie Mac saga drags, on it poisons the well each day and circumstances dictate that it too will end tragically and in bitter disappointment. My apologies for marching off on a literary tangent.

The yield on the benchmark 2 year note has dropped 6 basis points to a paranoid 2.24 percent. The yield on the benchmark 5 year note has thrust through the 3.00 level and is 7 basis points lower at 2.99 percent. The yield on the 10 year note has declined by 5 basis points to 3.78 percent and the yield on the Long Bond has slipped 3 basis points to 4.43 percent.

The yield differential between the 2 year note and the 10 year note has widened a basis point to 154 basis points.

The IG 10 is wrapped around 146 and is about 3 basis points wider on the day.

FNMA and Freddie Mac CDS are 290/300 which is about 60 basis points tighter than where they closed yesterday. I want someone to let me know how the stock can be down nearly 30 percent while these things improve. There is some very loud cognitive dissonance at work there.