Thursday, 21 August 2008

Fannie and Freddie lead spreads higher

From the FT:
Yield premiums across credit markets have jumped...
The CDX is near its highs and the iTraxx IG is near 100 again. The CMBX AAAs are nearly at 200 as this picture from Markit shows:

Much of the market action is GSE-motivated, with the market worried about the consequences of their problems. It seems unlikely that they will be able to do much about MBS spreads given they will be concentrating on how to refinance the $200B plus of their debt due this year. So:
[Short term] Treasuries are seeing some safe-haven buying, there are worries that greater government support for the GSEs will result in much more Treasury debt issuance as the taxpayer foots the clean-up bill for the mortgage malaise.

This explains why the yield curve.. has been steepening in recent days...

Both the two-year and five-year [swap] spreads are trading more than 1 per cent above Treasury debt...
With corporate credit and agency spreads wide and little fresh risk capital in the market, it is hard to see what will cause the markets to calm. Meanwhile Lone Star is doing some more fishing after the Merrill trade earlier in July, buying IKB. It is a good time to have cash...

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