Fixed Income Recap:

High yield last week did not see much sell-off at all with the equity fade. Very likely due to the lackluster August volume.  Widely discussed article out discussing the $33bil redemption from equity mutual funds as a nerrvous sign for the stock market from single investors.  Another article discussing wall street job cuts also on the negative side.  On the positive side, heavy cash balances on corporate balance sheets spurring m&a, which is helping equity futures in  the green this morning, S&P up +4.60.  

Fixed Income Most Recent Axes:

RCN Cable, Firstlight Power, Brand Energy, Coleto Creek, Swift Transportation, Celanese, CIT loans, Synagro

Newpag 11.375, Rescap 9.625, Realog 10.5, Locins, AIG/AMGEN 6.90, Visteon 7%

Treasury Rates Commentary

·         Another day and another volatile curve day. 30yrs were once again the star or should I say 2/36’s and that hump of the long end yield curve. Yesterday there was a very large (9k) ultra bond contract trade in December contracts. Bottom line: as a result of yesterdays trade the 2/36’s (CTD on ultra bond contract) outperformed 2/26 bonds (CTD on regular bond contract by close to 3bp’s. That’s a rather significant DV01! From today’s trading action we surmise that the seller is still short ultra contracts (i.e. 2/36) and long 30yr bonds and regular bond contracts. We imagine that ‘36/’37 paper will remain rich over the near term. In addition to this the nominal yield curve flattened sharply, once again, as the need for yield both on domestic and global level continues to grip the credit markets. 

·         The market did suffer late afternoon as equity markets managed to stage a modest comeback from earlier levels (-1% to close only -.5% lower). Treasuries, particularly the middle part of the curve (5’s-10’s) led us lower with 5/30’s flattening another 5.5 bp’s bringing this recent flattening move in roughly 30bp’s since the last bond auction. There was a large 5/30 flattener put though early this morning through the futures contracts.  Also of note is the 10/30 spread which closed today in 3.5bp’s to 104 but 2/10’s steepening out to 212 for a 3bp gain. Certainly not a market for the faint of heart. We still expect modest flattening in the near term as the market will get approximately $250B in new debt next week ( includes bill through 30 yr tips) plus continued talk of China lightening up on US holdings. Obviously we will see how everything pans out. We have maintained small flattening trade and look to add to these over time. We are also better sellers of the 2’s, 5’s, and 7 year rolls so please feel free to enquire.