All Clowns Must Be Destroyed Message Board

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Pastimes : All Clowns Must Be Destroyed

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To: pater tenebrarum who wrote (5520)	1/31/2000 7:48:00 PM
From: Giordano Bruno	Read Replies (1) of 42523

Interesting inversion speculation from Fridays prudent bear commentary on derivative markets... It is difficult to know exactly what is going on here. Our hunch, however, is that it looks increasingly like an unfolding dislocation in the derivatives market. Keep in mind that the large US banks have more than $28 trillion of interest rate derivatives on the books. Clearly, there were those within the leveraged speculating community that had made a seemingly reasonable bet on a steepening yield curve. This trade has been a big loser. It also is quite likely that the speculators have been shorting or buying put options on the long bond to hedge leveraged positions in mortgages, corporates and agency securities. These trades, as well, have not worked. Not much has worked in the credit markets over the past few months accept narrowing spread trades. Now these trades look vulnerable. We see that the generic 10-year swap spread widened 9 basis points over the past two days. Mortgages, in particular, performed very poorly as the spread between mortgages and 10-year Treasuries surged 10 basis points today and 14 basis points for the week. The spread on Fannie Mae, Freddie Mac and other agency paper also expanded this week. Importantly, these are all indications of less liquidity and increased systemic stress ? stress that has been inevitable with the combination of a desperately overheated economy and highly overleveraged financial system. Going forward, spreads on mortgages and agency securities should be followed closely. This is likely where the most leverage and speculation has developed, hence the area most prone to dislocation.

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