Wednesday, April 04, 2007

Trending higher and wider...

Two trends seems to entrenched themselves right now.

  1. Yields are rising. In the last 15 sessions, the largest rally in the 10-year has been 1.4 bps and only 5 days where the rate fell vs. 10 days where rates rose. Two of those "rally" days involved less than 1/2 bps move. This kind of slow leak higher is indicative of a buyer strike. Fast money pushed rates lower immediately after the 2/27 stock market mini-crash. But there has been no support from real money buyers.
  2. Corporate spreads are widening. Even a big rally in the stock market yesterday couldn't spark a generalized bid for corporates. Dealers are feeling around for the right level on many issues, and as a result, bid/ask spreads are wider. Most investment managers have expected wider corporate spreads eventually since 2005. So for the moment, they are content to sit on the sidelines and pat themselves on the back for making the right call. If it takes you 2 years to be right, are you really right? Regardless, I see corporate spreads leaking out further, but on the first sign of a sustained rally, PM's who are short are going to rush in and spreads will move tighter quickly.

The strategy I'm employing is to be short duration slightly, long MBS, neutral on corporates with a bias towards higher quality names.

6 comments:

Anonymous said...

Has the RePo activity been any more active this year vs. the last one or two years ?
I've seen some comments that in spite of the 5.25% Fed Funds , the Fed is largely increasing money supply . Is this true or are "conspiracy theory" bloggers just misleading their readers ?
Thanks in advance

Anonymous said...

Oh, God, do I love your posts. You really and truly know what you are talking about.

I guess obviously, if you were discussing underwater beekeeping, it wouldn't necessarily matter if you knew a lot about it, but the whole history of Western Civilazation (I'm not kidding at all) may be riding on the bond market right now, so your blog is really, really important.

Anonymous said...

Holy smokes!

Long MBS?

You have ice-water in your veins, right?

TDDG said...

On repos... data on temporary open market activity by Fed traders indicates they have been persistently adding cash to the system for the last 7 years. I'm talking less than 1-2 days per year over the last 7 have they actually reduced the money supply on a given day.

However, I'm not certain that's the end of the story. Coincidentally, I had been researching this very topic prior to your comment. I'll write a nice post when I actually have some answers.

Thanks for the kind words about my work. I've enjoyed this blog over the last 6 months and intend to keep it up. Dunno about Western Civilization and all that. Keep reading and we'll see.

When I generically say MBS I'm speaking of Agency MBS. No credit risk there.

Anonymous said...

tddg where is your source for Fed trader activity? This could be really helpful right about now... Thanks

TDDG said...

Bloomberg. I don't have the index code in front of me so try "Open Market Operations" then "HELP"