November 19, 2008
Man looks in the abyss, there's nothing staring back at him. At that moment man finds his character. And that is what keeps him out of the abyss. –Wall Street, 1987
The action in the fixed income markets today was for lack of a better term, brutal. We have continued to see strong buying in the shorter end of the curve, notably with the 2Y yield at 1.06%. Another notable development is the strong buying across the entire yield curve. The 30Y saw the most action, losing 23.1 basis points as buyers rushed in and put yields down to 3.90%. We are attributing some of this movement to short covering on players who piled into the 2/30 spread, that spread is now at 284 bps, after briefly reaching a high of 310 bps earlier this month (this was an all time high which hadn’t been seen in this spread since the collapse of Bear Stearns earlier this spring).
CMBS Market
According to chatter that we are hearing across the industry, the CMBS market today is in virtual free-fall or panic mode after concerns about defaults in commercial mortgages began spreading across the trading world like wildfire. AAA-rated tranches in CMBX are wider by nearly 100 basis points on the day. The AAA bonds are at Libor + 1200 basis points, which is somewhat tighter than L+1500 seen mid-day. The L+1200 refers that this paper is yielding around 15%.
Agency Market
Agencies were not spared in this brutal environment today either. FNMA 3 2010’s briefly hit 180bps over treasuries before tightening down to 159bps. The FHLMC 5 ¼ 2011’s blew out to an astonishing 111.3 bps, a 25bps widening. The FHLMC 5 ¼ 2016’s blew out 17.9 bps to 144.3 over tsys. Sellers were hitting this market particularly hard, fleeing from these assets while seeking the safety of Treasuries. The action for these 3 Agency issues primarily took place in the 2,5 and 10 year Treasury markets.
Corporate Bond Market
More sellers hit the corporate bond market today, with investors putting enough selling pressure on the market to cause prices to plummet in a freefall. While I don’t have the closing prices for today’s trade date in front of me at the time of publication, GM’s corp bonds were trading around 41.5 (41 cents on the dollar) while Ford Motors were trading around 26. The pressure in the Gaming sector continues to be evident, as Wynn Las Vegas and MGM Mirage saw selling pressure today as well. Last reference on those names are: WYNN trading at 73.48 with an
effective yield of 13.1%, and MGM trading at 62.75 with a yield of 38.88%.
Swaps Market
The carnage is continuing in the 30Y swap sector, where as you recall, we are betting on a convergence from the -7 level, back to the 2008 mean of around +30bps. We have seen enormous pressure in this market, today we reached -35 bps, which has caused considerable pain for participants who piled in on the convergence trade and are now running for the exits. Hearing that part of this has to do with Japanese players being heavy buyers of swaps due to a structured note that apparently triggers when the USDJPY is ~ 96 levels. I’m fuzzy on how that works in particular, but I have added that to the list of things that need to be looked into. The chart to the left depicts the swift movements that have taken place over the past few weeks. We cannot calculate volatility due to our models being confused—this spread was once thought to be
mathematically impossible to go below 0.
