Behind the Market Headline News

The financial chaos and sudden downward spiral of global economy have created a wide spread fear in the market places that the impending risk is the possibility of deflation as Japan had experienced in the last decade. This left "real" yield on current 5 yr treasury TIPS at 2.293%, about 29 bps HIGHER than the nominal yield on its big brother, 5-yr treasury note, which was traded at about 2.00%. The yield differences between 5 yr note and TIPS reached at par about a month ago and have steadily declined into negative territories (see the Bloomberg chart below). The spread for 10yr sector also collapsed from long term historical average 210 bps to only a few basis points above zero according to Bloomberg data. What market offer now for investors is you can lock-in at least 2.20% "real" yield if the security is hold until maturity and if there is any positive inflation comparing to the negative "real" yield for the nominal treasury notes. The only risk to hol...

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...

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...

The turmoils at FNM and FRE created great anxieties and opportunities for both equities and debt TRADERS. The newly passed housing rescued packages by the Congress and signed the President essentially changed the "implied" to "explicit" US government backings on both quasi agency's outstanding debts. Their spreads to US treasuries have tightened in last few weeks. However, the most liquid 15 yr and 30 yr fixed MBS from Freddie and Fannie were under great pressures in last few days. Using 10 yr swap rate as benchmark, FNCI (15 yr Fannie MBS TBA) was priced to 5.50% with spread of 78 bps, that was 4 times of historical 10 year average (see the first chart). FNCI was traded at the cheapest level since 1998. The 78 bp spread to the swap was about four sigmas of the mean. FNCL (30 yr Fannie MBS TBA) was also trade at the lowest level that we have not seen in the last decade (second chart). Comparing to other investment alternatives, current fixed MBS prov...

The fear of Fredie Mac ( FRE ) and Fannie Mae ( FNM ) might go under and seems never ending worries of financial system health created chaotic trading on Friday (7/11). On this very "scary" and almost panic market with VIX almost hit 30 intraday , one would fully expect to see the capital flow to the ultra safe US treasuries. However, on the contrary, across the curve, the treasuries tumbled as soon as the equity market opening bell rang, 10yr note fell 1-10/32 and yield shoot up from about 3.80% to close 4.00%, while the Freddie and Fannie bills and notes as well as fixed MBS were attracted quite some interests. For example, the spread of 2-yr agency note to treasury was tightened almost 20 bp from 71.4 bp on Thursday to 52.0 bp on Friday, while on 10 yr part curve, the spread was narrowed from 101.6 to 86.4. Freddie and Fannie CDS were also tightening but not widening. It is amazing to see the risk premium was declining when the risk of underlying companies seems ...

One of today's market headlines from a major outlets read something like "... stock market tumble.., treasuries rally .. on concerning credit issues and housing markets getting worse...". If this obvious and convenient explanations can hold any water, we would expect to see the credit products, like corporate bond, agency note and MBS , spreads to treasury should widen comparing to yesterday (obviously not credit concerning day). Well, the prices for agency (FNMA, FHLMC ) 15 and 30 yr fixed rate MBS have been rallied along with treasuries and the yield spreads of current coupon 15 and 30 yr MBS to the 10 yr treasury declined from declined from 158 bp and 201 bp to about 134 and 189 bp from yesterday. The agency bullet spread over treasuries were also narrow, and same can be said on corporate bond yield curve too. I had hard time to find the credit "concerns" that lead to today's equity sell-off. It is our human nature to identify the CAUSE when someth...