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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: jpk1 who wrote (180599)	1/29/2009 9:38:38 PM
From: MulhollandDrive	Read Replies (1) \| Respond to of 306849

and CRE will be crushed as well acrossthecurve.com SPREADS Prices of Treasury coupon securities plummeted today as overwhelming supply overwhelmed the markets. The 2 year note actually fared reasonably well amidst the carnage as its yield increased just 4 basis points to 0.94 percent. From that point on the carnage was rather heavy as paroxysms of selling drove yields higher. The yield on the 3 year note increased by 9 basis points to 1.32 percent. The yield on the 5 year note increased 12 basis points to 1.81 percent. The yield on the 10 year note soared 18 basis points to 2.85 percent. The yield on the 30 year bond vaulted 17 basis points to 3.59 percent. The yield on the 30 year bond has now increased over 100 basis points from its modern era low of about 2.50 and the yield on the 10 year note has surged over 80 basis points after flirting with 2.00 percent. The recent rout began with the FOMC statment yesterday and the realization that the Federal Reserve would not be rescuing the street from its underwriting duties in the near term. There was a poor street set up for the massive auction of today and bidding interest was not robust. The debacle in the Treasury market engendered selling in other markets as originators and servicers sold as the higher yields forced their moves. Some responded by paying in swaps. The corporate market was a source of unease ,too, as corporate Treasurers flooded the street with new issues. I have recounted some of the major issues in earlier posts. By my reckoning over $15 billion of corporate supply hit the street today. The imminent refunding is a worry as he ink will barely dry on this round of issuance when the next round begins. The House passed its version of a fiscal stimulus package yesterday and the reality is that when the Senate pases its version it will compel the need for even more money. Likewise, the “bad bank” solution to the financial crisis as the Treasury will need massive amounts of money to finance those purchases. In addition, to the servicer and hedge fund selling I did hear of hot money selling out the curve and money managers establishing steepeners. One dealer noted real money buying but his clients excerbated the trend as their purchases were concentrated in the 2 year/5 year sector. One trader noted,and I concur, that traders are now engaged in a game of financial chicken with Federal Reserve as traders attempt to force the Fed’s hand. The Fed has no desire for higher rates and the higher rates defeats the intent of the myriad of plans it has implememted to fight the financial crisis. I do not know what level on 5 year or 10 year notes would invite Federal Reserve coupon purchases. However, in this fragile environment such a level does exist and I think that the street will now probe to discern that level. The 2 year/10 year spread widened 8 basis points to 187 bsis points. The 2 year /5 year /30 year spread cheapened a tad to 89 basis points. Other butterfly spreads cratered. The 5year/10year/30 year spread moved about 10 basis points,with the 10 year cheapening. Likewise, 2year/5 year/10 year moved 11 basis points with the 5 year cheapening on that spread. The cheapening in each instance reflects the heavy paying in swaps and the heavy selling by mortgage servicers and originators. The salient point is that supply has overwhelmed the buyers and it will probably require higher yields to ultimately clear the market. *********************************** Mortgages got clobbered versus swaps and one salesman said that it was Armageddon late in the day. Mortgages lagged swaps by 1/2 point to 5/8 point. The Federal Reserve has purchased several hundred billion mortgages and is significantly underwater for all its efforts. They have bought big chunks of FNMA 4s between 100 and 101. Those bonds currently trade around 99. I mentioned in the preceding post that I thought that the street would force the Fed’s hand regarding purchases of Treasuries. The debacle in the Treasury market has erased the gains in the mortgage market. The Fed will not wait long to buy Treasuries as dilatory action will only lead to higher mortgage rates. Swap spreads are 8 basis points wider in the 2 year sector at 63 1/4. Five year spreads are 3 3/4 basis points wider at 65 3/4. Ten year spreads are 3 basis points wider at 23. Thirty year spreads are 3 basis points wider at Negative 16 1/2. Agency spreads are unchanged in 2 year and 10 years and 2 wider in 5 years.