Thursday, May 28, 2009

Fixed Income Follies

Yesterdays market collapse on the backs of the Treasury Sell off is just one more thing that alerts me to the inevitability of testing the March lows.

Why you say? Here goes...

1- The Treasury Yield Curve has just collapsed, with the 10 Year Treasury Yield at a Benanke/Geithner stomach turning 3.62%. The spread between 2YR/10YR hit a record level for steepness. The 2s10s just broke the previous wide of 260 bps and at last check was trading at 268 bps. The last time the spread was this wide was when we were in the midst of the Lehman/AIG Fiasco.

2-Negative Convexity (2ND Derivative of Duration) is in full effect in the Treasury Markets. People do not want anything to do with long-dated Treasuries.

3-Even though $35 Billion of 5 Year notes were successfully auctioned off to mostly foreign investors, the far end of the yield curve keeps bleeding red.

4-Questionable demand in 10-30YR maturities.

Most Importantly-

5-All that talk of cheap refinancing is now officially over, and all the recent mortgage refi activity which has been the primary catalyst for banks benefiting from the above mentioned 2-10 spread will cease shortly, absent another Quantitative Easing.

6-How much more can the Fed Balance Sheet grow? Its currently at $3.2 Trillion.

7- Stocks are inching up on no volume, totally oblivious to whats happening in the CDS/Treasury Mkt.

8-Money out of Treasury Mkt into Equities is on the surface a bad thing, as Mortgage Rates will rise killing the Refi Mkt.

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