To: Chispas who wrote (1497 ) 3/8/2004 1:35:26 PM From: mishedlo Read Replies (2) | Respond to Brian Reynolds on Treasurieswe are on the cusp of a lot more potential stimulus from refis should Treasury yields move just a little lower. As we've noted numerous times in the past, the only time when we've had both groups applying stimulus simultaneously in the last 5 years was last summer, which eventually led to significantly higher equity prices. There are a few different wrinkles, though, that are worth noting. The first is that there is a chance that mortgage investors may not suffer as much from having to buy Treasuries in a rising market to hedge themselves as they did last year. That is because, as we noted on Friday, that the rapidity of Friday's drop in bond yields brought in asset allocators who were selling Treasuries to buy stocks. That may have allowed mortgage investors to buy a significant amount of Treasuries Friday afternoon without further price damage. A look at the intra-day action of the swap market (USSP10 on Bloomberg), which is the first cousin of the Treasury market and an alternative vehicle for mortgage hedging, indicates that may be the case. If we were still running a mortgage portfolio (which is something we did in a former life), we would have been buying every Treasury-like product we could have in case other mortgage investors caused this move to feed on itself. While there is a chance that mortgage investors may have bought enough Treasuries to hedge themselves, our experience is that there is always someone who didn't get the word that the boat is leaving the dock. They then plunge into the water in an attempt to catch up, and their ripples can have a big impact. So, it is likely that someone didn't hear "Last ferry for Hoboken, now boarding!" last week and finds themselves not hedged as much as they should be. That means we'll need to keep an eye to see how Treasuries behave in the weeks ahead when the asset allocation buying subsides to see if mortgage related buying of Treasuries takes over. We noted in the days leading up to the payroll number that sentiment toward bonds, especially in the Fed Funds futures markets, was very negative, and the payroll number was a big disappointment (we were quoted on this in this morning's Tracking the Numbers column on Page C3 of the Wall St. Journal. This is in contrast to last year, when investors were expecting a Fed ease, and silly rumors of the Fed buying Treasuries prompted strong buying by buyers other than traditional fixed income managers.
