End-of-Day Market Update

From Suntrust: "At least for today, the FED's surprise announcement had its intended effect. Equities are 4% higher, the largest one-day gain in 5 years. Financial shares were especially boosted by the news. Spreads in sister markets came in nicely. Agency spreads narrowed 10-15 bp, broker names in the corporate market are 10 bp tighter, some of the MBS market snapped in by a full point in relation to Treasuries. This has all been at the expense of the Treasury market, which is headed into the close near the day's lows. 2 yr notes were hit the hardest, 26 bp higher in yield vs yesterday. The bond outperformed, rising only 7 bp on the day. The 2/10 curve narrowed to a spread of +183 bp vs +210 last week. Now the question becomes, will it last? One pundit pointed out that as of 02/27, primary dealers held in position approximately $140 bln agencies and $60 bln agency MBS securities, exactly the amount to be auctioned by the TSLF. In light of today's move by the FED, it is uncertain whether the FED will deliver 75 bp next Tuesday." From Deutsche Bank: "Equities rebound strongly as Fed takes further action to ease funding pressures, credit and swap spreads narrow, Dollar rebounds from early weakness... AAA/Aaa rated private-label residential MBS. According to our US economics team the details are still light, but they interpret this to include AAA subprime and Alt-A mortgage securities. And, they expect that the Fed will be lending out bills in exchange for mortgage collateral. The intention of this auction lending facility, which goes into effect on 27 March, is to provide more liquidity to the mortgage market and to make Treasuries less special, especially as the fed funds rate is reduced further. - While these are important steps in helping restore order, they fall short of some investors' expectations that the Fed would purchase agency/agency MBS debt outright. Additionally, these actions do not deal with constraints on bank balance sheets. Nonetheless, equity markets have greeted the news with the Dow up ...In debt markets, Treasury yields are up significantly and swap and credit spreads have narrowed. Even the beleaguered Dollar was given a lift by the news." From UBS: "Treasuries plunged this morning after the Fed disclosed its plan to lend $200 billion in Treasuries, while equities celebrated with the Dow Industrials up as much as 366 points late in the afternoon. In the minutes immediately following the announcement, 2-year yields spiked over 20bps, trading as high as 33bps higher than yesterday's close. 5-year yields also briefly went north of 30bps cheaper on the day, and the 2s30s curve flattened nearly 20bps as the market saw a lower likelihood of a large rate cut next week...TIPS outperformed nominals for the most part, and the breakeven curve flattened by 7bps. Treasury volume was a healthy 120% of the 30-day average...[Swap] spreads narrowed by double-digit basis points across the curve immediately following the Fed announcement. Since then, swap spreads have bounced off their lows by 2-3bps, though 2-year spreads are still tighter by 12bps. The Fed news was also obviously good for mortgages, which spent the day trading between 16 and 32 ticks tighter to Treasuries as a result of short squeezes....Agencies cheapened to Libor by 2bps in the front end, but outperformed swaps in 10-year space." From RBSGC: "The Fed delivered an expedited form of liquidity creativity which went a long, if temporary, way of addressing financing problems within the dealer community, first and foremost, and the system in general. This is, of course, the TSLF whose details are partially addressed above. Our quick take is that this gets the dealer community over an immediate 'crisis' of financing and will likely be an ongoing effort for 2008. This buys the dealers some time as they can, at least finance difficult positions. It does NOT, however, help them unload paper (and thereby free up balance sheet for other purposes) nor does it directly help finance non-qualifying assets. As discussed in Monday's Closing Notes, there are some efforts afoot to take the paper out of the system's hand. Sen. Dodd plans to introduce legislation to create a government corporation to actually buy mortgages. Presumably, the Fed could buy for the SOMA, too, but today's action clearly demonstrates they don't want to. The bond market responded as you might expect. Treasuries fell in price and the curve flattened; swap spreads tightened, and MBS tightened to Treasuries. It was all quite dramatic and initially on very good volume. We think the price action has some room to go -- i.e. flatter, cheaper -- as this new process is taken in by the market. Too, there is a chance that the Fed's action today skews the risk to a 'mere' 50 bp cut at the end of March -- that's our bet. And so with the steepening already crowded we see position unwinds as helping to further the price action underway. There is certainly NOT a lot else going on in terms of data or speakers and given that MBS financing has been such a central focus we can only anticipate the Fed's liquidity provision will prove more than a one-day-wonder and so prove a drag on the Treasury market as the process pans out...We do not think the Fed's liquidity provision vis TSLF marks the start of the end of the liquidity crisis let alone the economic cycle. Indeed, we envision that the price action in mortgages and other structures in Q1 will be reflected in more writedowns as earnings are announced. Further, there is an economic story to go with the dealers' problems. Don't mistake a change in prices for a change in facts (economic facts, anyway)." From Bloomberg: "U.S. stocks rallied the most in five years after the Federal Reserve said it will pump $200 billion into the financial system to shore up banks battered by mortgage-related losses. Washington Mutual Inc. climbed the most since 2000 on speculation the largest savings and loan will get a cash infusion from an outside investor. Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. led the Standard & Poor's 500 Financials Index to its biggest gain in eight years on expectations the Fed's move will spur lending. All 10 industry groups in the S&P 500 rose except for health-care companies. Stocks in Europe and Asia gained. The S&P 500 added 47.28 points, or 3.7 percent, to 1,320.65, trimming its decline for the year to 10 percent. The Dow Jones Industrial Average surged 416.66, or 3.6 percent, to 12,156.81. The Nasdaq Composite Index increased 86.42, or 4 percent, to 2,255.76. Eleven stocks gained for every one that fell on the New York Stock Exchange...The S&P 500 rebounded from the lowest level since August 2006 as 479 of its members advanced. Treasuries fell, pushing two- and five-year note yields up the most since 2004, as investors dumped holdings of government debt and bought stocks. The dollar rose the most in six months against the yen and rebounded from a record low versus the euro...Fannie Mae, the biggest provider of financing for U.S. mortgages, added $2.19 to $22. Freddie Mac, the second-largest, rose $2.77 to $20.16. Countrywide Financial Corp., the biggest U.S. mortgage lender, climbed 75 cents to $5.11. Washington Mutual added $1.84, or 18 percent, to $11.88."
Three month T-Bill yield rose 12 bp to 1.47%
Two year T-Note yield rose 26 bp to 1.74%
Ten year T-Note yield rose 13.5 bp to 3.59%
Dow rose 417 to 12,157
S&P 500 rose 47 to 1321
Dollar index rose 0.26 to 73.25
Yen at 103.4 per dollar
Euro at 1.534
Gold unchanged at $973
Oil rose $0.70 to $108.60 (Record High)
*All prices as of 4:58 PM