- The Treasury curve steepened last week as long end issuance met some resistance but economic weakness kept a bid for the front end of the curve. A 9bp tail at last week’s $10bn 30-year reopening may signal that the market is having trouble digesting long end issuance. However, the Treasury appears to be winding down its Special Financing Program, which will enable it to issue bills to finance TARP outlays.
- October’s record budget deficit of $237.2bn was larger than the budget deficit in all of FY 2007. With the Fed running out of room to ease, pressure is mounting for even more fiscal stimulus. Although economic weakness has so far driven market moves, the market is beginning to turn its attention to how the Treasury will finance its obligations.
- The latest European economic data releases were almost uniformly worse than expected. The economic picture is likely to get even gloomier as we move into the year-end and early 2009. Fiscal stimulus is on the way, but, with the exception of the UK, it is likely to be relatively small.
- A significant additional monetary stimulus will be needed. With money market spreads stubbornly high, market expects the ECB and the BoE to cut rates by more than is currently priced into the curve. Recommend to add to your portfolio a short December 2008, long June 2009 Euribor position and a long 3Y/2Y, short 3Y/10Y ATF straddle position in the swaption market.
Fixed Income Strategy - Nov 15 2008
November 15th, 2008 · No Comments
Tags: Fixed Income Strategy
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