Behind the Market Headline News

One of most intriguing event, which barely got any attention in the market, was that, for the first time in the history, 30 year USD swap spread dropped into negative territory today. The US treasury 30 year bond traded at 4.027% and the same maturity US dollar swap traded at 4.051%, i.e, 30 year swap spread was about -2.4 bps (see attached Bloomberg chart below) . The 30 year swap rate only go back to early 1994 in Bloomberg data base, in the last 14 years, swap curve was always and should traded at discount to the treasury benchmark, "risk-free" bogey. So what is mean for the equity and credit market? Or most importantly, is the swap market trying or pricing the much deep recession or an early signal of Japanese-style deflation market has feared in 2003? Is the US treasury credit quality put into challenges? Or just the abnormally due to temporary market forces? Isn't the market facing the greatest CREDIT crisis we ever face since the Great Depression? Should we expect

Today's dramatic 1000 point reversal of Dow 30 may be just the capitulation point that market has been looking for in this free fall market. Many other sentiment indicators, such as AAII bull and bear readings, VIX and 52 week high/low also point to the extremes. Underneath this gloomy and Armageddon scenario, one of most significant and interesting piece of data is in the futures market, specifically speculator's reading in this scary market. According to today's data release from CFTC, it looks that speculators have positioned for market (S&P500) turnaround. As this past Tuesday, speculators have built more than 102,000 long S&P500 positions, a highest in last five years. More importantly, the speculators also have reduced the bearish bet, short positions to just about 43,000, a lowest level in two years. Without questions, in the last few weeks, the equity market was the darkest period for the long side, but the end may be in sight at least in the short term. Th

The credit scare/crunch may present a great opportunity for many independent banks who depended on regional home bank system for the funding. This morning Fed funds traded at only 0.25-0.75%, plenty liquidity for banks if you can access it. At the same time Libor 1M and 3M rates went up over 10 bps at 4.11% and 4.33%, indicating extremely tight credit markets. Due to the enormous liquidity Fed has pumped into the system, the funding cost from FHLB , like FHLB Boston, are significantly cheaper than Libor markets. For example, FHLB Boston this morning offered 0.85%, 0.95%, 1.19% and 1.75% for 1 week, 2 week, 1 month and 2 month fundings for its members. On the asset sides, agency (Fannie , Freddie and FHLB ) debts were priced at level never seen before in term of spread to treasury in history. Two year agency yield spread is 100 bp over same maturity treasury, historically it has been only between 20 - 30 bps (see the first chart from Bloomberg ) and 2 year swap spread had widen ov