Closing Comment September 17 2008

September 17th, 2008 4:01 pm | by John Jansen |

Prices of Treasury coupon securities marched higher today as fears of systemic risk engulfed the markets. The Lehman bankruptcy caused the money market fund The Reserve Fund to break the buck and that sparked a massive flight to the short end of the Treasury market. (I will do bills first since there was so much action there today.)The flight to bills had begun yesterday and one dealer with whom I spoke marked the one month bill at 17 basis points yesterday. They are currently zero and have traded negative yield. I spoke with a trader at one shop who noted that his bill trader made a significant number of sales at negative rates today. The three month T bill closed yesterday at 85 basis points and it currently sits at 15 basis points. The yield on the six month bill is lower by about 50 basis points and the yield on the one year bill is lower by 17 basis points.

The Treasury actually sold $40billion of 35 day T bills today a rate of 30 basis points. That was the highest rate and represented the level at which the Treasury awarded securities. There were some bids at zero and the median bid was 5 basis points. Indirect bidders (foreign central banks) took more than half the issue.

The problems at the Reserve Fund have sparked a reaction which is system threatening. Money funds contain a reservoir of $3.56 trillion. That oversized liquidity pond funds insurance companies, banks, brokers, industrial companies and commercial establishments of every ilk. The financial system has faced financial headwinds for the past 13 months. If money leaves the funds to return to the safety of an FDIC insured account or to the safe sanctuary of T bills it will put a stretched and fragile system under even more stress. Funding issues will multiply in that environment and the result can only be dire.

Libor will be under pressure again tomorrow as three month Libor is offered for tomorrow at around 3.23 percent. I believe the set today was at 3.06 percent. One money market trader with whom I speak said that there was very little trading in financial sector names today. Corporate names with no exposure to financial trade superbly. He cited Nestle as an example and said there paper would trade between 1.75 percent and 2.00. Chocolate bars are pristine it seems.

I also asked about liquidations from money funds and he reported isolated instances of money funds selling to raise cash. He said that it did not feel that there were wholesale withdrawals and in his opinion the selling that he did see was prudent anticipation for withdrawals.

Yields on benchmark treasury debt dropped across the curve. The 2 year note benefited from the flight to quality bid at the front end and its yield tumbled 20 basis points to 1.61 percent. The yield on the 5 year note dropped 12 basis points to 3.47 percent. The yield on the 10 year treasury dropped, too, but the decline was a more subdued 6 basis points to close the day at 3.39 percent. The yield on the Long Bond dropped 3 basis points to 4.06 percent.

The 2year/10 year spread widened 14 basis points to 177 basis points.

Swap spreads widened dramatically. The 2 year swap spread widened 25 ½ basis points to 129 ½. The 5 year swap spread widened 13 ¾ basis points to 109 ½ and the 10 year spread widened 6 ¼ basis points to 69 ¼.

Mortgage spreads widened 15 basis points to 20 basis points.

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  1. 14 Responses to “Closing Comment September 17 2008”

  2. By Anonymiss on Sep 17, 2008 | Reply

    Washington Mutual, the struggling savings and loan, has been working on several efforts to save itself, including a potential sale, people briefed on the matter said Wednesday.

    The unsurprising announcement comes as the bank, which has suffered badly from losses on mortgages it had made, continues to stumble. Shares in Washington Mutual fell nearly 10 percent on Wednesday to $2.09; they have plunged 94 percent over the last 12 months. This week alone, investors have been frightened by Standard & Poor’s cutting of the bank’s debt rating to junk.

    Goldman Sachs, which Washington Mutual has hired, started the auction several days ago, these people said. Among the potential bidders that Goldman has talked to are Wells Fargo, JPMorgan Chase and HSBC.

    TPG, the private equity firm that led a $7 billion cash injection into Washington Mutual in April, said Wednesday afternoon that it would waive its right to be compensated if the bank sold more shares to raise capital. “Our goal is to maximize the bank’s flexibility in this difficult market environment,” TPG said in a statement.

    The April deal gave the investing group roughly 822 million new shares, diluting existing shareholders by nearly 50 percent. TPG bought shares for roughly $8.75 each. Those shares have since fallen to $2.14 a share, meaning that the value of the investor group’s holdings at Tuesday’s close had declined 75.5 percent.

    While the bank has a strong deposit base, the uncertainty of the markets and the increasingly poor housing market have increased concerns about Washington Mutual’s outlook. The bank plunged into the option adjustable rate mortgage business.


  3. By TGM on Sep 17, 2008 | Reply

    Anyone know if CDS spreads are trading consistent with credit spreads for actual bonds for a given name/term? Or has turmoil in the CDS market caused spreads to blow out beyond bond spreads?

  4. By Danny on Sep 17, 2008 | Reply



  5. By terminal on Sep 17, 2008 | Reply

    Get some rest for tomorrow. It could be one for the history books.

    Funds were trading late, but it looks as if the effective rate today was nearing triple digits above target.
    The TedSpread is hovering around 300, past anything seen in August last year.
    .gov has begun monetizing debt and wakened the commodity vigilantes.
    MS is now reported in talks with CITIC. CIC already owned 9.9% Funny that no one mentioned conflict of interest in endorsing a GSE bailout in the interest of its major shareholder.
    The money markets are on life support and tomorrow could be right up there with Oct. 19, 1987 which I remember well.

  6. By Stuart on Sep 17, 2008 | Reply

    I was informed that the TED spread reached 306 at the time the market crashed in ’87.

  7. By James on Sep 17, 2008 | Reply

    Hi, I found your blog on this new directory of WordPress Blogs at I dont know how your blog came up, must have been a typo, i duno. Anyways, I just clicked it and here I am. Your blog looks good. Have a nice day. James.

  8. By Dr.Dan on Sep 17, 2008 | Reply

    “Sellers of credit-default swaps on Morgan Stanley demanded 11.5 percentage points upfront and 5 percentage points a year to protect the company’s bonds for five years.”

    Holy shi* ….is this correct ?

  9. By John Jansen on Sep 17, 2008 | Reply

    They traded, I believe, as rich as 24 points up front at one point.

    Additionally, this is a family blog and I will delete you next time even though you have the asterisk.

    English is a rich and vibrant language. There are more than a few ways to express that emotion.



  10. By terminal on Sep 17, 2008 | Reply

    actually not quite that level.
    We’re well past the ’87 high tonight.

    Actually the CDS asking rate for MS was higher today.It helps to bear in mind that there are many quotes but few trades in CDS at the moment.

  11. By Dr.Dan on Sep 17, 2008 | Reply

    Please accept my apologies John. I will be more careful henceforth.

  12. By joe on Sep 17, 2008 | Reply

    Jon, any idea on how traffic this week has compared to panics in March and July? It seemed that you and a number of other financial blogs saw peak traffic around the time of maximum distress and were a fairly good contrary indicator.

  13. By John Jansen on Sep 17, 2008 | Reply

    Apology accepted.


  14. By John Jansen on Sep 17, 2008 | Reply


    Great question. Monday was the heaviest volume I have ever had. Tuesday was a shade shy of that. Wednesday was far and away the busiest day I have ever experienced. The statistical day is run on Greenwich mean time and runs from 800PM NY time untik 800Pm the following evening. So yes volume has exploded.

  15. By Sarah Palin on Sep 18, 2008 | Reply

    Good Lord John. All that’s going on in world and an ASTERISK upsets you?

    You have more problems than just the credit markets dude.

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