Across the Curve

Some Opening Comments June 27 2008

Prices of Treasury coupon securities are registering small mixed changes in overnight trading. The yield on the 2 year note has climbed by 3 basis points to 2.69 percent . The yields on each of the other benchmark issues have declined by a little less than 1 basis point . The 5 year note yields 3.39 percent and the 10 year note yields 4.03 percent. The yield on the Long Bond is 4.60 percent.The 2 year/10 year spread is flatter by 4 basis points and trades around 134 basis points.

The relative stability in Treasury yields reflects the limited movement in equity futures in overseas trading. Current futures market prices (it is 623AM on the beautiful South Shore of Long Island) indicate that the stock market will open with little change. So that has sapped some of the glory from the 2year note as that instrument needs craven fear creeping through the market place to sustain the gains attained yesterday.

The markets were rather jumpy yesterday and I had someone alerting me to concerns about counterparty risk as a repo desk circulated a bid list composed of some structured MBS collateral. As I noted at the time that conjured up visions of February and March when margin calls led to turmoil and turbulence. I did have two people with whom I regularly speak note that the market was beginning to feel as bad as it did in February and March.

I note this because the Fed conducted a TSLF operation yesterday . This Open Market operation had its genesis in the panic of last March. The salient point here is that there is no panic at this juncture. The Open Market Desk offered $25 billion of this facility and the primary dealers took only a little above $15 billion. The stop out rate was also indicative of a system operating, at least for now, smoothly.

The market braces for spending and income data this morning. The core PCE is expected to post a year over year gain of 2.2 percent. The remainder of the data will keep economists busy as the results will include the tax rebate largesse which the government has provided to citizens.

I would expect a quiet day with a narrow trading range today. It has been a volatile week and I would think that many participants will head for the exits early to enjoy a weekend of fun and frolic in the sand and sun.