Opening Comments August 19 2008

August 19th, 2008 6:25 am | by John Jansen |

Prices of Treasury coupon securities have posted modest gains in overseas trading. Despite the modest nature of the gains fear is still ascendant and motivates trading. The overnight press is replete with stories about stress in the Libor funding markets and about the growing angst over the status of FNMA and Freddie Mac.The yield on the benchmark 2 year note has declined 3 basis points to 2.30 percent. The yield on the 5 year note also slipped 3 basis points and it stands at 3.03 percent. The yield on the benchmark 10 year note dropped 1 basis point to 3.80 percent and the Long Bond is unchanged at 4.43.

The 2year/10 year spread widened 2 basis points to 150 basis points. This level ought to provide some resistance. We reached this level on the day of the 10 year note auction and it proved to be a level at which buyers emerged for the 10 year as well as for the 30 year on the following day.

The curve is manifesting a tendency to steepen but at this level it will probably require some news to give it the impetus for additional widening.

Stock markets around the globe tumbled on renewed credit concerns and renewed growth concerns. Most European exchanges have dropped about 1.5 percent and major Asian exchanges fell about 2.0 percent.

In Japan the BOJ chimed in on economic weakness and inflation and after doing a bit of a dance leaned in the direction of greater concern for the downside growth risk than inflation.

The Reserve Bank of Australia released the minutes of its most recent meeting and board members there made a strong case for lower rates sooner rather than later.

Members cited changes in borrowing behavior, weak confidence and declining asset prices as sources of concern for policy makers.

In Germany the financial breeze brought with it a whiff of inflation as PPI hit a 27 year high at 8.9 percent YOY. The monthly increase of 2.0percent was the largest such gain since 1974.

Financial stress will dominate trading once again today. Freddie Mac is selling $3billion 5 year notes today and investor response to that issue will be a crucial test of sentiment. Senior debt, such as this paper, experienced a widening of spreads versus Treasury debt yesterday but the episode was an orderly debacle.

The spread widening in the subordinated sector was not orderly but represented a frenzied effort to shed risk. Investors focused on the Barrons article and its report that Subordinated bond holders would likely receive nothing for their assets in a Treasury sponsored reorganization.

I will also focus on the Libor levels this morning and observe if the represent any significant increase it in risk premia.

There are two pieces of economic data today. I do not think PPI will matter much because it is backward looking and the market has rightly chosen to place greater importance on the recent sharp declines in commodity prices.

The other piece of the puzzle is the monthly data on Housing Starts. Housing brought us here so it can bring us home. Most economists are looking for a sharp decline in starts from the previous month.

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