February 27,2008 Closing Commentary

February 27th, 2008 2:40 pm | by John Jansen |

Prices of Treasury coupon securities have posted mixed results on a day in which the Treasury market played second fiddle to resurgent markets for spread product. The 2 yield on the 2year note declined by a basis point to 1.99 percent and the yield on the 5year note is unchanged at 2.88 percent. The yield on the 10year and the bond have each slippped abbout a basis point to 3.85 percent and 4.65 percent respectively. The 2year /10year spread is 186 basis points.

The Treasury auctioned $26 billion 2 year notes at a yield of 2.045 percent . That was a marginal concession of about 1/4basis pointo where debt was trading in the screens at bidding time. Indirect bidders were a little lesss than normal as they took 19.7 percent of the issue compared to the 23 percent average of the last three months.

OFHEO provided the basis for the histrionics in the market today with the announcement that it was removing portfolio cap from FNMA and Freddie Mac and would gradually reduce capital constraints led to a mortgage buying riot. Spreads on mortgages were tighter by 13 to 14 basis points versus swaps. One veteran salesman with whom I spoke thinks that the market over reacted. FNMA believes that the housing market has not bottomed and will not bottom until some time in 2009 so one can infer from the comments of the FNMA CEO that they will not be taking huge chunks of paper overnight.

Swap spreads ratcheted in across the curve and mortgage servicers were substantial receivers in the belly of the curve. Some corporate issuance was swapped and that benefitted spread tightening also.

Agency spreads tightened versus Treasuy debt but underperformed Libor by 1 basis point to 2 basis points across the curve. One trader noted that 10 year Freddie Mac paper is Libor + 5 basis points which is a record wide. He thought that the timing of the OFHEO announcement was odd and it was peculiar that they would allow the fox back into the henhouse on a day thet FNMA announces a $3.5 billion loss. He thinks the significant underperformance of agencies versus Libor reflect investor concerns about future losses and financial surprises.

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