PrefBlog

The Treasury Market Practices Group has released a new closing-time convention that should help the Treasury fails situation – at least to some extent:

Some buy-side market participants expressed dissatisfaction with the existing market convention under which dealers can deliver securities to customers until 3:15 p.m., but customers can usually only deliver securities to dealers until 3:00 p.m.6 This convention can sometimes leave a customer who had, at 3:00 p.m., an uncompleted obligation to receive securities and a matching uncompleted obligation to deliver the same securities in the position of taking in the securities after 3:00 p.m. without being able to turn the securities around and redeliver them on the same day. Instead of a pair of matched fails, the customer is left with an unmatched fail to deliver, resulting in higher interest expenses and/or an overdraft charge. Some buy-side market participants expressed the view that closing times should treat all market participants the same, regardless of whether they are real money investors, leveraged investors, or dealers.

It will now be 3:00pm for everybody and 3:15pm for sophisticated participants (who will mostly be dealers).

It is unusual, but not unheard of, for “real money” accounts to buy and sell the same issue on the same day; but it would be more of a problem for hot money accounts like hedge funds.

Not much price volatility today, as the market eased off a little bit on continued good volume. I forgot to do the spreads-to-corporates yesterday … today PerpetualDiscounts closed to yield 6.42%, equivalent to 8.99% at the standard 1.4x equivalency factor. Long Corporates currently yield about 7.0%, so the pre-tax interest-equivalent spread is now about 199bp – in line with what may be considered Credit-Crunch-but-not-Credit-Terror levels.

The FDIC has issued a call for papers to be delivered at the 9th Annual Bank Research Conference. Guess what the focus is:

The on-going financial sector crisis has focused attention on compensation and governance practices. It has been alleged that compensation and governance systems reward management for risk taking and short term profits and the size and scope of corporate operations expanded at the expense of shareholders and taxpayers. In response to incentives, the management of many financial services firms pursued investment strategies that proved to be unsustainable despite extensive resources devoted to prudential oversight and financial stability monitoring. Recent events highlight the need to examine the management incentives and governance structures in place in the financial services industry, including the supervisory agencies and central banks that regulate and service the industry.

Treasuries got hammered today:

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Yields on 10-year notes have risen more than 100 basis points since Fed officials said in March they would buy up to $300 billion of U.S. debt over six months to drive consumer rates down and lift the economy from recession.

“The markets are starting to grapple with the issue of what happens when the Fed exits and the Treasury needs to continue at the same pace,” said David Greenlaw, the chief financial economist in New York at Morgan Stanley, one of the 16 primary dealers that trade with the Fed and are required to bid at government bond auctions.

U.S. 10-year notes have lost 8.7 percent this year, according to Merrill Lynch & Co. indexes, while 30-year bonds have lost 25.5 percent. Two-year notes have gained 0.3 percent.

Across the Curve reports that:

The yield on the 2 year note increased 2 basis points to 0.97 percent. The yield on the 3 year note climbed 3 basis points to 1,49 percent. The yield on the 5 year note soared 11 basis points to 2.41 percent. The yield on the 10 year note catapulted 17 basis points higher to 3.72 percent. The yield on the bond rocketed 14 basis points to 4.63.

The 2year/10 year spread is a record 275 basis points.

The 2year/30 year spread is 366 basis points. The record on that is 369 on October 05 1992 at about 1130 AM.

Continued heavy volume for preferred shares today; PerpetualDiscounts took a break from their ascent; BAM issues were (presumably) hurt by the new issue announcement.

Bloomberg reports that low reported LIBOR rates are masking a high level of credit stratification.

It appears that – to nobody’s surprise – dubious loans were marked down too low during the crisis and buyers of these loans will make a killing as the cash trickles in:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

Spend-every-penny has stated the federal deficit will be $50-billion this year. Interest – just the interest – on this amount alone – never mind next year’s deficit, or the accumulated national debt, or any other trivialities – will soak up the $2-billion annually he neglected to spend during the boom. So much for the party of fiscal probity. Throw the rascals out!

Holy smokes, look at them Floaters go! Now up 31% ON THE MONTH … looks like a few speculators are betting on increased prime AND decreased yields AND a lower than 100% bankruptcy rate …

Volume was quite heavy again today, PerpetualDiscounts continued their ascent and FixedResets continued their pause.

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