March 07 2008 Closing Commentary

March 7th, 2008 3:57 pm | by John Jansen |

 Prices of Treasury coupon securities surged in another day of frantic frenzied and volatile trading. On this day the Federal Reserve genuflected in the direction of the illiquidity which holds large parts of the market hostage by announcing a reinforcement of the TAF program. In so doing they will lend balance sheet to the system and look to restore a modicum of confidence to a money market which has sunk into deep despair.

Seperately,the Labor Department released the monthly labor data which was unabashedly weak and which I described at length in an earlier posting. A straightforward reading of that report in concert with other recently released data easily leads to the conclusion that the economy is in recession. That idea has finally attached itself to the stock market and equities received a clubbing for the second straight day.

The yield curve reversed course today and has flattened though it is steeper than it was at the worst levels of the day.The 2 year note is finishing the day 2 basis points lower in yield at 1.48 percent. The 5 year note has seen its yield drop by 7 basis points to close at 2.40 percent .The yield on the benchmark 10 year has slipped 6 basis points to 3.52 percent and the Long Bond is down 3 basis points to 4.53 percent. The 2year 10 year spread has flattened to 204 basis points, though at its tightest it had traded at 198 basis points.

The price action was interesting(at least to me) as the TAF announcement drained some of the fear premium from the market and lent a bid to off the run paper which had been languishing. Following that announcement the curve flattened and visited its tightest levels and the 2 year note traded behind 1.60 percent.

That interlude of stability was short lived as the equity market crumbled and safety and security reeemerged as a concern of investors. Off the runs watched their previous gains erode and the curve steepened again .

Agency spreads are tighter by 6 basis points to 7 basis points in the 2 year sector and by 4 basis points in the 5 year sector. Ten year agencies have also tightened by 4 basis points. None of these sectors has regained the outsized losses of yesterday. Traders report that this market is illiquid with wide bid/offer spreads. One trader noted that the low absolute level of yields has hurt this sector as some clients have sold into rallies. Credit related weakness also weighs on spreads. The same trader made the sage observation that a backup in yields would benefit spreads here as he felt there was money to be spent at higher absolute yield levels.

Some stability has returned to the MBS pass through market. Conventional wisdom posits that the TAF actions of the Fed will have a salutary effect on MBS product. I guess that is true if the liquidation selling abates,too. Mortgages improved by about ½ point versus Treasuries and low coupon stuff lead the charge.

Corporate bonds opened unchanged and then widened pretty sharply but bounced back on the TAF announcement and on some recovery in equities. Sentiment remains negative and very little trades in the secondary market. The IG9 made a new wide when it was quoted 186 ½ 188 ½ but is closing unchanged at 181 183. Single name CDS on banks and brokers were under intense pressure. As an example Wachovia opened 285 305 and is finishing 300 310.

I run on.

Have a great weekend.

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