I mentioned the increasing nervousness of the Treasury market on February 8 and now Accrued Interest has opined:
Treasury yields at current levels can only be supported if the Fed holds interest rates low for an extended period of time and inflation doesn’t become a problem. Traders know this is a very fine line to walk, and confidence in Bernanke’s ability to walk that line is, well, not as strong as it could be. It will probably take a pretty stiff recession to keep inflation low despite highly accomodative monetary policy. Tuesday’s ISM report supported the idea that we are already in a recession, and therefore supported rates at their current levels. But if it turns out we aren’t in a recession, the Fed will have to make a rapid reversal of policy to combat inflation. If so, long rates will be the big loser.
Place yer bets, gents, place yer bets! Never mind Bernanke, I have serious doubts about anyone’s ability to walk the line demanded by current long rates.
In news that may be of interest to BCE Takeover Speculators, Naked Capitalism has exerpted articles regarding the current weakness of the Collateralized Loan Obligation (CLO) market:
Investment banks are sitting on sizable unsold inventories that are declining in value, thus sure to lead to further writedowns. And ironically, the Fed’s interest rate cuts are only making matters worse. These instruments are floating-rate, priced off the short end of the yield curve, so rate cuts lower their interest payments, making them less attractive to investors.
The Journal article adds some useful information: UBS and Wachovia are set to auction $700 million of loans believed to underlie some collateralized loan obligations (instruments made from pools of leveraged loans) adding to further pressure to the market.
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Readers who have become heartily sick of seeing the word “monoline” in this blog will be gratified to learn that a multi-line insurer has now gotten in trouble over a CDS portfolio:
American International Group Inc., the world’s largest insurer by assets, fell the most in 20 years in New York trading after auditors found faulty accounting may have understated losses on some holdings.
So-called credit-default swaps issued by AIG lost $4.88 billion in value in October and November, four times more than previously disclosed, the company said today in a filing with the U.S. Securities and Exchange Commission. AIG’s auditors found “material weakness” in its accounting for the contracts, according to the filing. The insurer said it has no yearend price estimate for the obligations.
Similarly, SocGen is looking for €5.5-billion. Meanwhile, a group of US banks is seeking to avoid foreclosures:
Bank of America Corp., Citigroup Inc. and four other lenders will announce new steps tomorrow to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.
The banks will start “Project Lifeline,” offering, on a case-by-case basis, a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The companies met with Treasury officials over the past week to discuss ways to encourage homeowners to get in touch with their mortgage servicers, one person familiar with the deliberations said.
Translation (courtesy of PrefBlogs Spin/English dictionary [patent pending]): “Please don’t make us buy all these damn houses.”
On February 6 I noted some news reports about Auction Rate Municipals auctions failing … now they have been joined by some Student Loan securities:
College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids.
The company wouldn’t say which specific issues failed or identify the banks that managed the auctions.
Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won’t commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.
A quiet day, of overall good performance. To my regret, I am unable to update the indices at this time. I regret this because it proves I’m an idiot. Never mind the story … you don’t want to know.
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| BCE.PR.A | FixFloat | 87,900 | Scotia crossed 50,000 shares at 23.97, then another 36,500 shares at 24.00. Closed at 23.96-03, 4×4. |
| RY.PR.E | PerpetualDiscount | 78,600 | RBC crossed 75,000 at 21.70. Now with a pre-tax bid-YTW of 5.18% based on a bid of 21.71 and a limitMaturity. |
| TD.PR.Q | PerpetualPremium | 73,375 | Nesbitt bought 50,000 shares from National Bank at 25.38. Now with a pre-tax bid-YTW of 5.45% based on a bid of 25.37 and a call 2017-3-2 at 25.00. |
| RY.PR.W | PerpetualDiscount | 57,200 | Now with a pre-tax bid-YTW of 5.21% based on a bid of 23.59 and a limitMaturity. |
| POW.PR.D | PerpetualDiscount | 53,650 | Nesbitt crossed 50,000 at 23.45. Now with a pre-tax bid-YTW of 5.43% based on a bid of 23.26 and a limitMaturity. |
There were twelve other index-included $25-equivalent issues that traded over 10,000 shares today.
Update, 2008-2-12: Finally! The indices!
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | 5.49% | 5.51% | 46,485 | 14.5 | 2 | +0.1225% | 1,085.1 |
| Fixed-Floater | 5.04% | 5.69% | 81,551 | 14.7 | 7 | -0.1823% | 1,016.8 |
| Floater | 4.96% | 5.01% | 75,380 | 15.45 | 3 | -0.2017% | 851.9 |
| Op. Retract | 4.83% | 3.45% | 81,514 | 3.12 | 15 | -0.1416% | 1,042.8 |
| Split-Share | 5.30% | 5.51% | 99,286 | 4.21 | 15 | +0.1638% | 1,038.1 |
| Interest Bearing | 6.25% | 6.40% | 60,112 | 3.37 | 4 | +0.0759% | 1,080.0 |
| Perpetual-Premium | 5.74% | 4.98% | 398,475 | 5.21 | 16 | +0.0188% | 1,026.0 |
| Perpetual-Discount | 5.39% | 5.42% | 295,773 | 14.76 | 52 | +0.1540% | 953.0 |
[…] AIG’s woes with Credit Default Swaps, which were mentioned yesterday, continued to attract attention today. AIG issued a press release: AIG continues to believe that the mark-to-market unrealized losses on the super senior credit default swap portfolio of AIG Financial Products Corp. (AIGFP) are not indicative of the losses AIGFP may realize over time. Based upon its most current analyses, AIG believes that any losses AIGFP may realize over time as a result of meeting its obligations under these derivatives will not be material to AIG. […]
[…] Monoline woes are also spreading into the LBO market, as noted yesterday and on February 11. It seems that formerly reliable Negative Basis Trades are turning positive: Banks’ exposures through bond insurers, or monolines, is far from limited to mortgage-related MBS and muni bonds. There’s a third big exposure – to leveraged buyout loans – that banks will have to deal with if monolines hit the rocks. […]