Agency Spreads

Agency spreads are unchanged in the 2 year sector and a basis point tighter in the 5 year sector. Ten year spreads are a basis point wider.

Federal Home Loan Bank priced a 3 year note today at T+35. This issue has not budged and is 35/34.5.

One analyst with whom I speak regularly thinks that notwithstanding the tightest spreads in two years, the risk is that spreads move tighter from here.

There is very little supply and Freddie Mac has engaged itself by buying back debt. The GSE has purchased floaters and subordinated paper thus far. One analyst suggested that Freddie might be involved shrinking its balance sheet as mandated by the conservatorship agreement when the wheels fell off the GSE bicycle last September.

The conservatorship agreement stated that Freddie would begin to reduce its balance sheet by 10 percent each year beginning in 2010. Here is a paragraph from the statement which then Secretary Paulson issued last September as FNMA and Freddie Mac were passing into financial oblivion and redundancy:

“To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.”

Anyway,one observed thinks that the “unwinding” might be underway as we speak.

MBS and Some VOL

Mortgages remain in line with swaps.

There has been some pick up in origination selling as rates have declined but that selling has been met by the steady force of buying by the Federal Reserve purchases.

The three month/ten year ATM straddle is 626 basis points this morning.


Mortgages are opening very quietly and are a couple of ticks tighter to swaps.

The level of activity is very subdued.

Some Spreads

Morgan Stanley earnings disappointed investors this morning and that has precipitated a sell off in corporate bond spreads and in financial names in particular.

Some Morgan Stanley paper is as much as 20 basis points wider from previous day closing levels.

And the recent Citibank deal is now underwater. It is 385/380. It priced at 375 and I observed a 366 bid yesterday.

Swap spreads are little changed.

Thirty year spreads are one basis point wider at NEGATIVE 23 1/2. Two year ,five year and ten year spreads are unchanged at 43 1/2,47 1/2 and 21, respectively.


By Brad Skillman
July 22 (Bloomberg) — Charge-offs on U.S. credit cards as
measured by Moody’s Credit Card Index rose in June, reaching a
record 10.76 percent.


William O Donnell is an analyst and strategist with RBS Securities  (the firm formerly known as Greenwich Capital). He publishes an excellent piece each morning.

He notes in his report this morning that investors have been busy unwinding Bund/Treasury trades. Bunds have lagged Treasuries by 8 basis points to 9 basis points over the last 24 hours, according to the RBS analyst.

Bond Market Open July 22 2009

Prices of Treasury coupon securities are virtually unchanged in overnight trading. The 2 year note yields 0.92 percent and the 3 year note yields 1.45 percent. The yield on the 5 year note is 2.34 percent whilst the investment grade 7 year note yields 3.03 percent. The 10 year note yields 3.48 percent and the Long Bond yields 4.39 percent.

The 2year/10 year spread is 248 basis points.

The 10 year/30 year spread is 89 basis points.

The 2year/5 year/30 year spread is 63 basis points.

Chairman Bernanke will trek back up the hill and deliver the second round of his testimony to the Senate. I believe the opening statement is always identical to that which he offered the House yesterday. If he is to break any ground it will be in the Q and A.

We receive FHFA home price data for May today. The consensus is for a 0.2 percent decline. It declined 0.1 percent in April.

I do not have  strong opinion about the near term course of interest rates. If you held a gun to my head I would focus on the equity markets which appear to want to do better. I guess if we can improve from current levels that will sap energy from bonds as supply approaches next week.

I think I will just sit back and watch how the day develops.

Markets vs Teams

Last week, I had the pleasure of attending a small panel discussion between Jason Green (General Partner at Emergence Capital and investor in companies such as DoubleClick, aQuantive, and Ask Jeeves) and Reid Hoffman (Founder of LinkedIn, EVP at Paypal, and angel investor in over 60 startups such as Facebook, IronPort, Flickr, and Digg). During the panel, the question of market vs team in venture/angel investing came up. Jason was in the “team” camp while Reid was more in “market” camp – but these are very broad generalizations and both emphasized the importance of both in any investment they make. Examples were discussed that give credence to both strategies working and it largely being a personal investing preference. On several occasions, I have heard this debate of market vs team with Sequoia and Kleiner Perkins being used as the poster children for each view point, respectively. Its a discussion item that I’ve heard on a number of occasions, and I can see the arguments on both sides. While I sometimes hear the scenario being, would you rather invest in a great team in a crappy market or a crappy team in a great market, in general practice, the more realistic scenario for an investor may be, would you rather invest in a A+ team in an A- market or a A- team in a A+ market or a A+ team in an unknown/unclear market or an unproven team in a A+ market. This is where, at least for me personally, I spend more time thinking about. When the VC funnel is 1 investment out of 100-200 companies/business plans seen, the expectation is that they are choosing from a few companies that have the A+/A- or A+/unknown dynamic – and have already weeded out the B or C teams and markets in the vetting process. It can be difficult to do a post-mortem on successful or failing companies to try to see a trend because, as the saying goes, success has many fathers (in this case it is both people and market) and failure has none. People often attribute success of a company to the founding/management team (which may or may not be accurate) but the more interesting question is, “before the company was successful and was a startup with 3 guys and powerpoint deck, how did the VCs rate the team.” Also, there are enough examples of what is initially felt to be a great team failing. I was not personally familiar (so please correct me if I am inaccurate) with some of the larger Southern California successes when they were just being founded but from hearsay, the teams at LowerMyBills and MySpace had trouble raising venture capital very early on yet went on to becoming huge successes and the teams eventually proving themselves to be great founders and operators. While they both raised venture funding later in their lives, it was beyond the very early stage and they had proven themselves on several fronts from an execution perspective.
Continue reading "Markets vs Teams"

Marginal Chinese Dollars

The FT has an article which details comments by the Chinese premier in which he states that some of the country’s pile of dollars will be used to assist corporations in making non China acquisitions.

The US budget deficit will be prodigious over the next decade and the loss of any dollars from the pool available to fund our domestic spending spree is a troubling prospect.

Bond Market Close July 21 2009

Prices of treasury coupon securities have surged today as the staid market for government bonds transposes into a very volatile and combustible venue. The greatest gains were in the longer maturities while shorter dated paper improved but lagged its longer maturity brethren.

Once again a confluence of factors worked to push prices higher ( and with the inverse relationship intact, yields lower).

Chairman Bernanke testified before a Congressional committee and in his testimony he reasserted that the funds rate would be low for an extended period.

That motivated buyers in the long end of the Treasury market as well as spread product buyers. As I have pointed out in other posts today spread product has ratcheted tighter today. Every time someone sells a corporate bond or an agency (or other piece of spread product) that transactions usually generates a need to buy a Treasury,either as a hedge gets lifted (versus a long sale) or as a hedge is necessitated by a short sale.

The Federal Reserve has neatly defused the “exit strategy’ debate with an orgy of openness as opposed to an orgy of opaqueness and obfuscation which might have occurred in the past. Bernanke has made it abundantly clear that the SOMA will not be disengorging itself of recently acquired assets anytime soon. And when the time arrives to embark on a period of restrictive policy, asset sales are the least likely policy instrument to employed. That epiphany calmed the markets and scared shorts who had prepared for an ugly pronouncement .

The Federal Reserve did its part to monetize the debt today as it purchased  $ 7 billion of 2016 through 2019 paper. Nearly 50 percent of the purchase was concentrated in one issue,the current 7 year note.

Just to throw a little cold water on the party I would not be a fair and balance reporter if I did not note that on Thursday the Treasury will announce $ 101 billion of securities which will be on the auction block next week.

Last month the Treasury sold $ 101 billion in 2 year ,5 year and 7 year notes. Analysts lean toward a similar announcement this time, too.

In addition there will be a 20 year TIPS bond and there should be $ 8 billion of those bad boys.

The yield on the 2 year note has slipped 6 basis points to 0.91 percent. The yield on the 3 year note has edged lower by 8 basis points to 1.45 percent. The yield on the 5 year note has tumbled 12 basis points to 2.34 percent. The yield on the 7 year note declined 13 basis points to 3.02 percent. The yield on the 10 year note dropped 13 basis points to 3.47 percccent. The yield on the Long Bond declined 14 basis points to 4.37 percent.

The 2 year/10 year sprad narrowed 7   basis points to 256 basis points.

The 10 year/30 year spread is 90 basis points.

And the belly performed well with 2year/5 year/30 year at 60 basis points.


Agency spreads are 2 basis points to 3 basis points tighter across the curve. One traded averred that the Bernanke restatement that financing would be low for that famous “extended period” generated some buying in the under one year sector.

Home Loan announced a 3 year deal which will price tomorrow. It will probably be $ 3billion and spread talk is T+ 36.

MBS and Swaps and VOL

Swap spreads are tighter across the yield curve. One salesman noted receiving by real money, speculators and servicers.

Two year spreads have narrowed 3 3/4 basis points to 43 3/4. Five year spreads have narrowed 2 1/2 basis points to 47 3/4. Ten year spreads have tightened 3 1/4 basis points to 20 1/2. Thirty year spreads are 4 basis points tighter at NEGATIVE 24.

Volatility is coming off pretty hard and the three month/ten year ATM straddle is 621 mid.

MBS are unchanged versus swaps.

In MBS one salesman described the Federal Reserve as an orderly buyer.

Foreign buyers have been better buyers of GNMAs over FNMA.

Servicers have been buyers of low coupons.

Innocuous Ben

Innocuous is a word which springs to mind when one finishes reading the Ben Bernanke prepared text. He did not add anything to our store of knowledge regarding monetary policy.

The economic climate and its credit backdrop has improved but each remains fragile and tentative.

The labor market remains quite week and reduced levels of income could pose problems for consumption.

Inflation is not a problem and with weak labor markets and plenty of excess capacity, there is little cause for worry.

Against that backdrop, the funds rate will remain low for “an extended period”.

Not much new in any of that.

I think,though, that he broke a bit of new ground on the budget and his exhortation to put the country on a “sustainable long term fiscal path’. That cannot please the apparatchiks in the Administration and if Mr Bernanke were campaigning for another term at the helm, I suspect that he would have been more circumspect in his utterance.

He also noted that Congressional oversight of the Federal Reserve should not encroach on the Fed’s ability to independently cobble together monetary policy.


TheTreasury market is having a huge move to lower yields as we speak. i will eventually get to Bernanke but there is not enough substance in his testimony to justify the price action.

There has been central bank buying throughout the morning in the 3 year through 7 year part of the curve.

The Open Market Desk is intervening in the market as I pen this by purchasing 2016 through 2019 paper.

The market is very thin and the combination of central bank buying and Fed buying has shorts on the run.

Traders continue to report that the market is thin and illiquid and small blocks will cause sharp price movements.

And we traded yesterday morning at 3.72 percent on 10 year notes. I  suspect that the move into the mid 3.50s emboldened some to establish short positions which now look less than propitious.


The Citibank 30 year priced yesterday at T+380. I have just seen a quote in which the bid side is 366.

Bond Market Open July 21 2009

Prices of Treasury coupon securities are exhibiting mixed changes in overnight trading with most benchmark issues registering very modest losses.

The yield on the 2 year note increased a solitary basis point to 0.98 percent. The yield on the 3 year note is dramatically unchanged at 1.53 percent. The yield on the 5 year note edged higher by a basis point to 2.46 percent. The yield on the 10 year note and the yield on the Long Bond increased in each instance by a basis point to 3.62 percent and 4.52 percent,respectively.

The yield curve has steepened a tad since I wrote my late in the day summary yesterday. The 2year/10 is year spread is 264 basis points and was 262 basis points when I wrote previously.

The 10year/30 year spread is 90 basis points and was 88 basis points late yesterday.

The 2year/5year/30 year spread has richened 2 basis points to 58 basis points this morning.

There was very little noteworthy economic news overnight. Consumer prices in Hong Kong declined 0.9 percent YOY which was the first time they have registered a decline since 2005.

There are no high profile economic releases today but trading in all markets will wait with bated breath for the testimony of Chairman Bernanke this morning.

He wrote an Op-Ed piece for the WSJ regarding exit strategies and I posted that earlier. It is interesting in that he emphasized manipulation of the liability side of the Fed’s balance sheet and deemphasized direct sales of assets.

He noted that the Fed could sell assets or in the case of mortgages experience prepayments which would also reduce assets.

However he principally focused on the liability side of the equation and noted that the new tool which allows the Federal Reserve to pay interest on reserve balances can be a very effective monetary policy instrument.

He also noted that the Fed could go the traditional route and use old fashioned matched sales to jack up the funds rate.

I would also be remiss if I did not reiterate a point I made in my original posting on this topic. The Chairman noted that he did not expect to use any of these tools soon as he expects that the funds rate will remain low for an extended period of time and that the exit strategy colloquy is a bit pedantic and unnecessary at the current time.

It is such because I believe Mr Bernanke will also strive to emphasize that the economy is still sliding, albeit at a reduced rate. I think he will note that the Committee expects the unemployment rate to stay at troublesome levels well into 2011 and that this will be another “jobless recovery”.

The Federal Reserve also has a keen interest in capacity utilization and I am sure he will note the slack in the economy generated by historically low levels of capacity utilization.


Libor (three month) opened at 0.50313 today versus 0.50500 yesterday.

Bernanke in the Wall Street Journal on Exit Strategies

Chairman Bernanke (in an unusual move ) discusses exit strategies from the Fed’s current policy stance. I thought it was unusual as the piece is in the Wall Street Journal on the day that the Chairman will testify before Congress on the economic outlook and monetary policy.

The article is rather pedestrian and does divulge any novel approaches. It is pretty standard stuff with reliance on paying higher rates of interest on reserve accounts or employing traditional matched sales.

I would also be remiss if I failed to note that at both the beginning and the end of the article that the Chairman noted that funds would remain low for an extended period of   time and economic conditions did not warrant shrinkage of the Fed balance sheet at the present time.

Bond Market Close July 20 2009

Prices of treasury coupon securities opened with weakness but have spent the remainder of the day rebounding and are closing with robust gains.

Why did the market shift direction? As always there is more than one reason.

I think the principal reason is deal flow and heavy demand for a variety of quality fixed income assets in a very thin markets.

As I mentioned in the previous post Citibank was busy today issuing $ 2.5 billion of 30 year bonds. Investors clamored for that debt. Conventional wisdom holds that the deal was swapped and that would have created demand from a swap desk.

I also noted that sprads were in as much as 10 basis points for quality BBB paper. When a customer buys that paper,the trader who made the sale generally will have to buy something against that sale. That type of transaction would have prodded the market to new heights.

In general the salespersons and traders with whom I spoke provided testimony that there had been buying but most believed that the buying was not large enough to have precipitated the substantial price gins with which we are closing the day.

Most believed that vacation induced staffing encouraged thin markets and illiquidty and exacerbated the price movements.

One trader with a technicians bent noted that the 3.72 percent level on the 10 year note was approximately a .618 Fibionacci retracement of the 4.00 percent to 3.25 percent move.

Finally, Chairman Bernanke will speak (ex cathedra) tomorrow before Congress when he will enlighted the assembled lawmakers about the FOMC outlook for the economy and interest rates over the remander of the year. In advance of that testimony trading shorts are busy covering.

The yield on the 2 year note has slipped 3 basis points to 0.96 percent. The yield on the 3 year note has also declined 3 basis points and rests at 1.53 percent. The yield on the 5 year note tumbled 6 basis points to 2.43 percent. The yield on the 10 year note also fell 6 basis points and it trades at 3.58 percent. The yield on the 30 year bond declined 7 basis points to 4.46 percent.

The 2year/10 year spread narrowed 3 basis points to 262 basis points.

The 10 year/30 year spread narrowed a basis point to 88 basis points.

The 2year/5year/30 year spread is 56 basis     points.

The breakeven on 10 year TIPS continues to widen and sits at 189 basis points. That spread had been as narrow at 153 basis points last week.

MBS and VOL and Swaps and Corporates and Agencies

Swap spreads have tightened several basis points from levels which prevailed when I wrote about them earlier today.

Two year spreads are 1/2 basis points tighter on the day at 47 1/4. Five year spreads are 1 1/4 basis points wider at 50 3/4. Earlier they had been at 52. Ten year spreads were at 25 basis points earlier in the day but are closing unchanged at 23 3/4. Thirty year spreads are at NEGATIVE 20 which is 1 1/4 basis points tighter on the day. Earlier in the day when I wrote they were at NEGATIVE 19.

MBS are 2 ticks wider to swaps.

The three month /ten year ATM swaption straddle is 638 basis points.

Corporate bond spreads continue to ratchet tighter and the greatest gains (on spread) are in credits with incremental yield. One salesman noted that AAA and AA paper is just a couple of basis points tighter.If one marches down the credit curve to solid BBB names some of that stuff is 10 basis points tighter.

Citibank was offering $ 2billion 30 year bonds at T+ 3 7/8 . Investors flocked to the issue and the deal size is now $ 2.5 billion and the spread talk is now T+380. Participants report that there are $ 7 billion to $ 9 billion of orders for the bond of that financial cripple which stands because of the largess of the taxpayers.

In a less caustic vain, a paper products company named BEMIS is issuing 5 year and 10 year paper. I believe that the total is $ 1billion. The company is A3/BBB+ and sources report that there are nearly $ 10billion in orders for that deal.

The salient point is that there is tremendous demand for that which is perceived as a quality asset.

Agency spreads are mixed. Two year sector paper is unchanged to a basis point wider. Five year sector paper is 2 basis points tighter and 10 year paper is unchanged. One trader noted some bank demand in the 3 year sector.

The same trader note that as the Open Market Desk Hoovers in paper the market has become less and less liquid.