Yesterday was notable for two things: a massive rally in MBS product, and a big drop in Libor funding rates. It appears that the globally crafted plans to restore confidence in the financial markets are beginning to get some traction. Treasury prices are up this morning pushing yields a bit lower along the length of the curve, interbank lending rates are easing, and spreads are tightening on investment product.
The graph below shows the spread between 3 month Libor and 1 year Treasury. As you can see, Interbank lending rates as indicated by Libor have dropped significantly. Libor rates affect not only banks in England that need dollar denominated loans, they affect anyone who owns an adjustable rate security that resets over this curve, they affect the GSE’s that fund off the Libor curve, this rate has far reaching affects in the global economy.
Yesterday afternoon we saw a massive tightening in MBS spreads. The graph below shows the recent history of MBS spreads but a more concrete example is available. Yesterday morning I shot out a 10 year MBS that was available at 99-16 to provide a 5.10% yield. By early afternoon that bond had run up to 100-19 to yield a 4.77%. The bond dropped over 30 basis points in yield over a very short period of time in the early afternoon.
You’ve likely seen some of the ridiculous levels in corporate paper as well recently. Two weeks ago we saw AAA rated, 3 month GE paper yielding 6.43%. Yesterday 1-YEAR paper from GE was down to 5.11%. Spreads are still wide in some sectors but they are getting more efficiently priced each week as we move through this crisis.
Fed Funds futures are pricing in a 100% chance of a cut at the 10/29/08 FOMC meeting. 58% of the probability is being placed on a 1.00% Fed Funds level.
If you have any questions on this material or if you need anything from me just let me know.
Steve Scaramastro
800-311-0707
Posts
No comments:
Post a Comment