Prices of Treasury coupon securities are registering modest gains today with the largest price increases in longer maturities. The yield on the 2 year Treasury is virtually unchanged from late yesterday at 2.16 percent and the yield on the benchmark 10year note has slipped about 3 basis points to 3.64 percent. That leaves the gap between those two issues at 148 basis points.
Trading today in all the markets represent a clash between two powerful and conflicting forces. Credit strains and financial stress acted to widen spreads and cause early havoc in the equity markets. But as the day progressed, a new force emerged and it dominated sentiment. The saving grace was the dominance of the 125 basis point liquidity provision by the Central Bank and the belief(fostered by their statement) that they would act quickly to forestall the economy from slipping into recession.
The sentiment shift in favor of the Fed prevailed and sparked a huge recovery in equities which stabilized the wobbly credit markets.
I would be remiss and less than forthright if I did not offer one caveat which Ray Remy of Daiwa Securities offered to me. The target Fed Funds rate is now 3.00 percent. Relative to the funds rate several sectors of the market look expensive and send a signal or warning sign that investors think something is still askew in the system. Treasury bills rates are down by 20 basis points today and almost the entire list trades with a 1 percent handle. Repo is very rich and trades 100 basis points to 125 basis points through the funds rate. That is general collateral and not hot run specials. To further illustrate this point, today was settlement day for bills,2 year notes,5 year notes, and 20 year TIPS. That should have put pressure on GC repo . The spread between the repo rate and the funds rate should have narrowed but did not. According to Mr Remy, that indicates that there is still a high level of anxiety and investors crave safety.
Agency spreads were a tad wider on the day. There was robust demand for callable paper . Several dealers reported client interest in long maturity paper with short dated calls which produced high coupons. FNMA has scheduled a supply anouncement for tomorrow. They are not specific regarding which portion og the curve they might visit but there was some talk that they might issue in the 3 year sector.