End-of-Day Market Update

From SunTrust: “Armageddon seemed to be near this morning with the collapse of another hedge fund, but things changed swiftly and with great magnitude. Paulson was flapping his gums regarding regulatory changes (too late) about the same time Barney Frank proposed another government bail-out. The tape bomb that turned the markets around sharply, however, was the comment from S&P that banks may be nearing the end of sub-prime write-downs. They opine that losses will amount to $285 bln and that the market is "past the halfway mark". The DOW moved from -220 points to +88 points in short order. Treasury coupons took about a 20 bp swing from high to low today alone. Adding further insult, the Treasury auctioned $10 bln 10 yr notes to an unenthusiastic crowd…This has been a vicious week for volatility. Tuesday's 30 bp move in 2 yrs was one of the largest daily moves in over a decade. Intra-day swings in 10's have totalled over 80 bp this week.”
From Lehman: “The treasury market opened with a big bid on the back of weak global equities, dollar/yen below 100, higher gold (explain again to me why higher gold is good
for bonds?) and a continuation of the general state of disarray. But the market came off the highs as stocks turned and dealers set up for 10 year supply, and an abysmal auction set the tone for the rest of the day. Post-auction, the market continued to sell off, led by selling of the back end…Flows were mixed, and both mortgage and fast money accounts
were active buyers in the early run-up. But when the market turned, it turned hard, spurred by a rebound in equities, and dealer selling into 10 year supply. A story that S&P said that the "end is in sight" for subprime loss writedowns at major financial institutions also got a bunch of play right around the market's turn, but we think people are in a still in a "we'll believe it when we see it" mode when it comes to these things…Despite a very good concession, the 10 year note tailed about 3 basis points, as indirect bids totaled just 5-6%, leaving dealers to buy, and then quickly sell, the balance. The downtrade was a little messy…The yield curve steepened quite a bit…”
From Deutsche Bank: “These markets just aren’t getting any easier. In Asian time yesterday, equity markets stumbled badly on the news that Carlyle Capital Group had been unable to reach agreement with its lenders, likely forcing the company to hand over the remaining collateral underpinning its mortgage bond fund. And with the US retail sales report for February disappointing as well the North American session was shaping up to be an ugly one. But after trading well in the red early in the session, the US equity market has not only pared those losses, but actually moved into the black. The catalyst seems to have been comments from S&P suggesting that the end of the subprime writedown process is now in sight, at least for the world’s major financial institutions. After the experience of the past 12 months, it seems amazing to this writer that the opinions of the rating agencies carry such force!”
From Bloomberg: “U.S. stocks rose for the second day this week after Standard & Poor's predicted an end to banks' subprime mortgage writedowns and gold surged above $1,000 an ounce, sparking a rally in mining shares…Fannie Mae, the biggest provider of money for U.S. mortgages, helped financial shares recover from a 4 percent decline after S&P said banks have already disclosed the majority of their writedowns. The S&P 500 added 6.7 points, or 0.5 percent, to 1,315.47 after dropping as much as 2 percent. The Dow Jones Industrial Average climbed 35.5, or 0.3 percent, to 12,145.74. The Nasdaq Composite Index rallied 19.74, or 0.9 percent, to 2,263.61. Almost five stocks rose for every two that fell on the New York Stock Exchange…Stocks tumbled earlier after the $16.6 billion default at a Carlyle Group bond fund added to turbulence in financial markets, and an unexpected drop in retail sales signaled the economy has slid into a recession. Nine of 10 industry groups in the S&P 500 advanced, after all 10 opened the day lower. Raw-materials producers gained the most, climbing 2 percent as a group. Gold rose above $1,000 an ounce for the first time as mounting credit-market losses spurred demand for bullion as a haven from the sagging dollar.”
From Bloomberg: “The dollar fell below 100 yen earlier today for the first time since 1995 and set a record low against the euro after a Carlyle Group fund defaulted on about $16.6 billion of debt, adding to turmoil in financial markets…The U.S. currency fell against a basket of six major trading partners to the lowest since the index began in 1973 …Japan sold yen on the four occasions since 1995 when the currency approached 100 to support exporters…The yen's 24 percent gain against the dollar from a 4 1/2-year low on June 22 will damage earnings, Toyota President Katsuaki Watanabe said today…The yen also gained as investors exited so-called carry trades, in which they borrow in a country with low interest rates and buy higher-yielding assets elsewhere, earning the spread between the two. The risk is that currency moves erase those profits…Japan's benchmark rate of 0.5 percent compares with 3 percent in the U.S., 4 percent in Europe, 7.25 percent in Australia and 8.25 percent in New Zealand.”
From UBS: “The Treasury market had a good morning going after troubles at Carlyle and weak stocks sent the Treasury 2yr yield back below 1.50%. Treasury prices then reversed course (lower) when the Chairman of the House Financial Services Committee, Barney Frank, unveiled a $300B plan to rescue the housing and mortgage markets. We saw central bank buyers of 10-year coupon paper and 2-way flow in intermediates, and the 2s10s curve steepened nearly 7bps on the day as intermediates underperformed in the sell-off. TIPS lagged nominals across the board, especially in the belly of the curve. Treasury volume was 110% of the 30-day average… swap curve went from flatter on the day to steeper. Spreads blew out early in the session as the world appeared to be in full-meltdown mode, then came in 7-9bps off their wides to finish tighter on the day. Agencies saw better selling in the front end and buying in the belly-- underperforming swaps by 2bps in the front end and 5bps further out on the curve. 5- and 10-year agencies are now at new historic wides versus Libor. Mortgages saw heavy selling this morning, going out to about 28 ticks wider to Treasuries. After the S&P announcement and the rescue package headlines hit the wires, we saw fast money buying, and mortgages went all the way back to unchanged to Treasuries on the day. Whew...”
Three month T-Bill yield fell 5 bp to 1.36%.
Two year T-Note yield rose 1. bp to 1.63%
Ten year T-Note yield rose 7 bp to 3.53%
Dow rose 36 to 12,146
S&P 500 rose 7 to 1315.5
Dollar index fell .50 to 71.90
Yen at 100.6 per dollar
Euro at 1.563
Gold rose $12 to $995
Oil rose $0.28 to $110.20
*All prices as of 5:00 PM