Rally at the close

So the end of todays trading brought us a big rally. It was one of those days when the guy next to you says "why is the 10 year trading off?" and you look up and the 10 year is off 10 tics as the stock market is erasing losses. Inside of 2 minutes the 10 year is off 18 tics, then it's off a full point and the Dow is up 300 points and there are no headlines indicating why. So we start hunting for an answer...Wachovia is up big...JP Morgan is up big...hell all the financials are up big.

Then we get the headline that Calpers said they are no longer going to lend shares to short sellers. OK...people covering short sales might account for a good bit of the stock market activity but why are bonds selling off acros the length of the curve?

Then we get the headline about the RTC. Senator Schumer (the same one that leaked the "internal" FDIC memo that caused a run on IndyMac) is talking about a plan by the Treasury to resurrect the RTC to handle all of the bad mortgages that are festering on bank balance sheets.

The market reacted very positively to the news if for no other reason than somebody was being proactive. This market was looking for hope and it got a ray of it this afternoon.

I've not seen any of the details of the plan but I hope it punishes the appropriate parties...the taxpayer shouldn't foot the bill for poor underwriting standards.

The mood at the end of the day was one of relief. Not so much of relief that everything is better (we're a long way from that) but relief that there was an interuption in the seemingly never ending stream of bad news. Things were so bad this week that I only got a cursory look at the economic data that came out. Normally that news is like the drum beat that moves the fixed income world. What is the data telling us, what does it say about the economy, what will the Fed do, etc. It's Thursday night and the only thing I can recall about the numbers is that the Philadelphia Fed Index was better than expected...I recall seeing a survey estimate of -10.0 and I think it posted a positive 3 and change. The point here is that things were happening so quickly that nobody had the time to stop and look at the data...there were so many other problems to deal with that the economic data simply didn't matter.

Money market funds are starting to break down. The hallmarks of a money market fund are liquidity, modest return, and safety of principal. The fallout from Lehman Brothers going bankrupt is roiling the money market funds. Primary Reserve Fund was the first to break the buck...several more funds did it today. This is the kiss of death for a money market fund. Safety of principal means that you get a dollar back for every dollar you put in...you earn a modest amount of interest on that money because the money market fund invests in high grade, short term fixed income securities. Lehman's bankruptcy hit a lot of funds that held short Lehman paper.

Even funds with no exposure to Lehman are getting hammered due to guilt by association. If one money market fund is hurting people they are all considered capable of it, and you don't want to be the last guy to request a redemption.

The corporate bond market is still locked up. I saw a AAA rated GE bond with 60 days to maturity trade today at a 6.00% yield. That is a ridiculous level for short AAA paper. That is roughly 580 basis points over the 2 month T Bill. The money market buyers are running for their lives and they are taking their liquidity with them. They want the safety of Treasuries so badly that they are leaving 6.00% AAA rated GE paper on the table in favor of a 0.07% return on a T bill. THAT is what fear looks like.

Thats it for today.