Closing Commentary March 18 2008

March 18th, 2008 3:31 pm | by John Jansen |

 Prices of Treasury coupon securities are taking a sharp tumble today as the 75 basis point rate cut by the FOMC disappointed the hopes of some market participants who longed for 100 basis points. The statement also took a bit of a harsher stance regarding inflation and two members dissented from the majority and sought a smaller rate cut.

Separately, (and I had noted this in earlier post) a risk taking appetite has taken hold and that nascent mindset has caused some flight from Treasuries to riskier spread product and to equities.

Yields are sharply higher today. The yield on the 2 year note has jumped 23 basis points to 1.57 percent. The 5 year note yield has registered a gain of 20 basis points to 2.40 percent. The yield on the benchmark 10 year Treasury has increased by 16 basis points to 3.46 percent and the yield on the bond has jumped 6 basis points to 4.35 percent.

The yield curve has undergone some severe twisting and has flattened significantly with the 2 year /10 year spread closing at 189 basis points. That spread is 8 basis points flatter on the day and the 2 year/ 30 year spread is 17 basis points tighter . That trade has been an annuity and a profit center for some and it will be rather sloppy if there is a mass exodus.

Corporate bonds have advanced modestly on spread today. Sentiment has improved but given the extent of the gains in the equity market one participant with whom I spoke demurred that the gains were insignificant. Downtrodden financials did see significant tightening and some Citi and Lehman paper moved 25 basis points and 50 basis points respectively.One salesman with whom I spoke also reported a smattering of interest in hybrids of regional bank names on which the spreads were near 400 basis points. The corporate calendar remains muted and the only noteworthy deal was a 10 year subordinated deal from PNC on which the early talk was T+360 basis points.

I noted the robust buying of Agency paper in an earlier post. The FOMC statement engendered some disappointment and 5 year and 10 year agencies surrendered about 9 basis points of the outsized gains achieved earlier.

Mortgage spreads are tighter by 3 ticks or so versus the swap curve. There was substantial buying by servicers early and in the late going originators are shellacking it ( to quote a rather colorful one of my daily interlocutors).

In the theatre of the absurd department the Treasury issued a one month bill today at a discount of 0.52 percent. You give them $999,595 this Thursday and 28 days hence they will return $1,000,000 to you. That is a tidy profit before taxes of $405. After the IRS takes its cut you can barely afford theatre tickets.These are difficult times for plutocrats and other members of the rentier class!

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