January 29th, 2009 6:28 pm | by John Jansen |

Mortgages got clobbered versus swaps and one salesman said that it was Armageddon late in the day. Mortgages lagged swaps by 1/2 point to 5/8 point.

The Federal Reserve has purchased several hunded billion mortgages and is significantly underwater for all its efforts. They have bought big chunks of FNMA 4s between 100 and 101. Those bonds currently trade around 99.

I mentioned in the preceding post that I thought that the street would force the Fed’s hand regarding purchases of Treasuries. The debacle in the Treasury market has erased the gains in the mortgage market. The Fed will not wait long to buy Treasuries as dilatory action will only lead to higher mortgage rates.

Swap spreads are 8 basis points wider in the 2 year sector at 63 1/4.  Five year spreads are 3 3/4 basis points wider at 65 3/4.  Ten year spreads are 3 basis points wider at 23. Thirty year spreads are 3 basis points wider at Negative 16 1/2.

Agency spreads are unchanged in 2 year and 10 years and 2 wider in 5 years.

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  1. 17 Responses to “Spreads”

  2. By James on Jan 29, 2009 | Reply

    I bought some IEF/TLT today.

  3. By Steve on Jan 29, 2009 | Reply

    “the Fed will not be dilatory”

    Idunno, every time that something needs to be done quickly by the Fed it does not get done unless some bankers ass is on the line.

    Expecting more slaughter in treasury land myself.

  4. By BL on Jan 29, 2009 | Reply

    I’m hearing China has tipped into recession and hence not likely to be a buyer of U.S. debt.

    The Bank of Japan wants to drop the Yen/Dollar cross, will they but dollars outright or Treasuries….?

  5. By James on Jan 29, 2009 | Reply

    I think China is a PASSIVE “investor”. Given all the trade surplus, FDI, hot money inflow, what else China can invest besides US assets?

    In last Q, there was estimated ~ 200B $ (hot money) out flow from China. Given this kind of drastic change, US treasury seems to be the only option for them. I would say they did excellent job to park big chunk of money in treasury.

    One mistake people are making is that they believe China OWN that 1.9T currency reserve. In reality, that money really belongs to some one else. When some one else wants out, China has to have his/her money READY.

  6. By ssnt on Jan 29, 2009 | Reply

    What do you think about TBT? It is up a bunch today.

  7. By John Jansen on Jan 29, 2009 | Reply

    Tough to buy it now after yields have moved 100 bps

  8. By ssnt on Jan 29, 2009 | Reply

    Right, but check this out:

    Treasuries Headed for Full-Blown Bear Market, Citigroup Says
    Email | Print | A A A

    By Molly Seltzer

    Jan. 29 (Bloomberg) — Treasuries are moving into a “full- blown” bear market as global stimulus packages increase demand for capital, according to Citigroup Inc.

    “This may sound a bit ridiculous, but we think we have begun a full-blown bear market in fixed income,” wrote Tom Fitzpatrick, Citigroup’s New York-based chief technical analyst, and London-based strategist Shyam Devani. “The commodity that is going to be the most in demand as far as the eye can see is capital. As a consequence, the cost of capital can only go one way — up.”

    The 30-year bond’s yield may rise to 5 percent by late 2009, the highest level since August 2007, according to Citigroup. The U.S. will probably borrow $2.5 trillion this fiscal year, compared with $892 billion last year, according to Goldman Sachs Group Inc. The firms are among the 17 primary dealers that trade directly with the Federal Reserve.

    The bond’s yield rose 11 basis points, or 0.11 percentage point, to 3.53 percent today. It fell to 2.509 percent on Dec. 18, the lowest level since sales of the security began in 1977.

    President Barack Obama’s $819 billion stimulus package, passed in the U.S. House yesterday by a 244-188 vote, is equivalent to one-quarter of the entire federal budget. Countries including the U.K., Germany and India are also increasing spending to boost economic growth.

    “The most striking feeling we have as 2009 begins is that there is this wall of consensus negativity about financial markets,” the analysts wrote. “We believe this comes from the need for huge government issuance around the world competing for a scarce resource.”

    Increased government spending will spur concern that inflation will accelerate, prompting the greenback to weaken and gold to rise, the analysts added.

  9. By Anarchus on Jan 29, 2009 | Reply

    I know they say not to fight city hall or tug on superman’s cape, but . . . . . isn’t it conceivable that if the Fed went off buying Treasuries hand-over-fist that yields would go up rather than go down?

    I don’t own Treasuries at present and so don’t understand the mindset completely, but if I were a sentient holder of Treasury securities there’s nothing that would frighten me more than the Bernanke Fed monetizing the debt.

  10. By Dr.Dan on Jan 29, 2009 | Reply

    Will this stress in FID markets cause equity market sell offs ?

  11. By BL on Jan 30, 2009 | Reply

    Consumer borrowing and business borrowing have plummeted, and the savings rate has risen the U.S. Businesses are cutting costs and paying off debt. Previously huge investments in the oil patch have about frozen up.

    I think all we’re going to see is a reversal of the flight to safety.

    I’d say most of the pundits on Bloomberg’s podcasts think the stimulus is not large enough, and that tax cuts will be saved rather than spent.


  12. By Alex on Jan 30, 2009 | Reply

    Russia Ignatyev: No Longer Holds Fannie, Freddie Bonds -Report

  13. By Torp on Jan 30, 2009 | Reply

    “Russia Ignatyev: No Longer Holds Fannie, Freddie Bonds -Report”

    Nonsense, they are too embarassed to admit that they own it.

  14. By fatbrick on Jan 30, 2009 | Reply

    No James, remember, the reserve includes the export revenue from SOEs. For FDI, theoretically most FX cannot get out because of capital control. They can always choose to open the gate to let capital out or tight the gate to increase the barrier.

  15. By Michael Oliphant on Jan 30, 2009 | Reply

    For the federal reserve to even have suggested buying the long bond is extreme lunacy. As with all the other strategies that were as idiotic, the market is facing down the fed. Until they give up the idiotic suggestion that they can manipulate prices on the long bond, the long bonds will continue to tank. With it goes the stock market. The result will be brutal and recovery will be a long, long road.

    If you have any hope that your once proud nation has a decent chance of getting out of this with a shirt on it’s back, you must contact your representative and tell them to let the banks fail and guarantee the deposits. It is the only way out of this mess and the only reason it hasn’t been done to this point is because there are too many friends of politicians who will lose their jobs and credibility.

    The jump in yield on the long bond is a very serious sign. Do not disregard the ill wind that is blowing your way. As a concerned citizen, you must act. Now!

  16. By Steve on Feb 1, 2009 | Reply

    I have always felt that the answer wasn’t to bail out the banks, but to just guarantee the deposits.
    Over the weekend, I read a few news stories that more banks had failed, and that the Feds were unable to find a buyer for one of them. Interestingly, the story also indicated that the depositors would be mailed checks for their deposits within a couple of days and would have their money by the end of the week.

    Why not keep it simple? Just guarantee the deposits, let the banks fail, and let the chips fall where they may. At least that way, the American People won’t be faced with the staggering amount of debt being created in this monstrous science experiment!

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