Daily
Market Commentary
Commentary prepared by Balance Sheet Solutions,
LLC, Member FINRA/SIPC
Tuesday, August 19, 2008 at 9:00 a.m. CST |
Treasuries continued to rally on concerns that global growth is decelerating. The rally was also due to renewed speculation that Fannie Mae and Freddie Mac may need a government bailout. Give this troublesome backdrop, equities, led by the financial sector, declined sharply. On the day, Fannie Mae and Freddie Mac declined by 22% and 25%, respectively, leading the major equity indices lower with the DOW, S&P 500 and NASDAQ shedding 1.5%.
As equities dropped, Treasuries benefited with a flight to quality bid. Yields on the two-year and 10-year Treasury benchmarks declined by five and three basis points, respectively. This led to a modest steepening of the yield curve.
From a broader perspective, it is important to note that the major global bond markets - despite very high headline inflation readings - have rallied for four consecutive weeks. This was due to fears of a synchronized global economic slowdown. For example, in the Euro zone and the UK, interest rates have plunged by 50-60 basis points in the short to intermediate end of the curve. In Japan, long the poster child of deflation, interest rates have declined by 10 basis points. And in the U.S., rates have very quietly rallied by 30 basis points. The markets are ever increasingly assigning higher probabilities to co-ordinate Central Bank easing in the months ahead.
Early this morning, the markets were once again disappointed with startlingly high inflation data and more bad news on the housing front. The Producer Price Index (PPI) was reported at 1.2% or 9.8%, twice as high as consensus expectations. This was the highest inflation reading in 27 years. Core PPI - ex food and energy - was also more than double the market consensus at 0.7% vs. 0.2%. Year-over-year core PPI is running at 3.5%. Regarding the housing sector, Housing Starts declined by 9% to 965,000 units. Building Permits also declined by 14% suggesting weak housing activity for months to come.
In the credit markets, spreads continue to remain quite volatile and remain at close to historically wide levels. While we expect spreads to remain volatile in the near term, we continue to believe that the short duration, senior debt debentures of GSEs offer good value. We also continue to overweight select short duration (seasoned) MBS and CMO products that exhibit stable cash flows, good call protection and limited extension risk. While it is difficult to know when the current credit and liquidity crisis will end, we feel that investors are currently well compensated for the embedded risks of these markets. However, it is important to stress that credit unions should avoid “subordinated” debt issues. This is due to the distinct possibility that those securities will not be protected should both agencies be nationalized.
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contained herein is prepared by Balance Sheet Solutions, LLC
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