Mar 22. Sentiment shift reflects increased funding pressures

Near contracts continue to be pressured with red eurodollar pack -6.625 bps.  There has been a sentiment shift as talk has grown about a discount rate hike that would force funding away from the window and to the open market.  Coupled with that are sev’l other factors, including a surprise hike of 25 bps by India, and the end of the TALF program. From BBG: “Sallie Mae had been selling debt backed by its student loans through the Fed’s Term Asset-Backed Securities Loan Facility, or TALF. The program, begun last March to jumpstart the market for securities backed by consumer and small business loans, ends this month.” Bernanke also made weekend comments about not letting banks become too large. In other words, as the Fed takes steps to restore “normal” functioning of the market, even without a hike in the FF target, pressure on near term funding increases. 

–At the first hint of short end snugging, the curve flattened, with 2/10 down to 269, a fall of 2 bps.  30 yr bonds were actually higher on the day. I may be misinterpreting the reaction, but it is almost as if the market perceives such economic fragility that even minor reductions in Fed support could cause the house to fall down.  Of course, support for treasuries may be partially due to problems with Greece and the Baltics, etc, but that would have to be weighed against increased tensions with China.

Posted on March 21, 2010 at 2:27 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply