Closing Commentary September 16 2008

Prices of Treasury coupon securities are registering broad based losses in a day dominated by the fortunes, misfortunes and future prospects of AIG. There were many stories and comments about that company but a late in the day story that the Fed was reconsidering their position on aiding AIG sparked a bond market sell off and an equity market rally.The yield on the 2 year note has climbed 19 basis points and yields 1.90 percent. The yield on the 5 year note has climbed 13 basis points to 2.66 percent, The yield on the benchmark 10 year note has jumped 9 basis points to 3.48 percent and the Long Bond is the relative value winner of the day as its yield climbed only 6 basis points to 4.08 percent. (The yield on the Long Bond at one point today established a record modern era low yield of 3.90 percent.)

The 2 year/ 10 year spread tightened by 10 basis points to 159 basis points.

The 2 year /5 year /30 year butterfly trade cheapened by 12 basis points to 65 basis points.

The sticky funds rate presented a problem today and at last inquiry was trading near the target rate. Overnight Libor for tomorrow is trading at 2.93 percent. One trader with whom I spoke thought that it would drift higher onto the setting tomorrow as the failure of the FOMC to slash rates will engender disappointment.

Swap spreads are wider by 3 ½ basis points in the 2 year sector, 3 ½ basis point in the 5 year sector and 1 1/4 basis points wider in the 10 year sector.

Mortgages as represented by the FNMA 5 percent coupon lagged Treasuries by 14 /32. Originators were better sellers but hedge funds and money managers were better buyers.

The IG 10 has recovered along with stocks and is trading 189/192 after trading about 25 wider than that this morning. AIG CDS has improved about 7 points on the story of possible Fed action to aid them. The CDS are currently 35/38 but one salesman noted that there was much quoting but little risk taking. He expected that to be the case until there is clarity on the issues surrounding AIG.

Originally published at Across the Curve and reproduced here with the author’s permission.