- The Treasury’s announcement that it was abandoning its plans to purchase troubled assets, leaving available funds to the new administration, hurt risk appetite. In addition, the Treasury’s wind down of the Supplementary Financing Program (SFP) lowered expectations for issuance. These developments combined with dismal economic data to push Treasuries to yields not seen in data going back over half a century.
- With the SFP winding down and TARP outlays winding down until the new administration is in place, the supply of bills may shrink by year-end, possibly richening bills even further from their current absurdly rich levels. However, longer out the curve, the supply demand balance could become much more problematic as TARP outlays increase later in 2009, especially as the major foreign holders of Treasuries enact fiscal measures to support their own economies.
- On the European front, even though one continue to think that the implied compression in Euribor spreads is too optimistic, one would not bet against the market here. If anything, continue to expect that weak economic data and falling inflation will ultimately lead the ECB to throw away any remaining caution and follow the Fed and the Bank of England, albeit probably avoiding the outsized rate cuts that we saw from these central banks.
- However, trying to calibrate monetary policy moves is probably of secondary importance in a financial market driven by fear and as most economic indicators are diving. Being long bonds has been and will probably remain the right trade. Add to positions on a pullback.
Fixed Income Strategy - yields data not seen in over half a century
November 24th, 2008 · No Comments
Tags: Fixed Income Strategy
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