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Monday, September 08, 2008


credit watching

in the aftermath of the big bailout, the salient markets to watch are not stocks or commodities but bonds and the dollar. it's there that the success or failure of the bailout will be measured.

so far, there has been little movement in MBS.

Mortgages are tighter to swaps by about 1 1/2 points . They look to be about 2 points tighter to benchmark treasury paper. However, one salesman with whom I spoke noted that on Friday nobody desired to buy them and today nobody wants to sell them. The market is highly illiquid.

agencies have come way in, though also liquidity strained.

and -- as jck warned -- there are some very serious rumblings from the CDS market.

Thirteen “major” dealers of credit-default swaps agreed “unanimously” that the rescue constitutes a credit event triggering payment or delivery of the companies’ bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said.

“This is a big deal,” said Sarah Percy-Dove, head of credit research at Colonial First State Global Asset Management in Sydney. “The market is not experienced at settling a credit event for a name of this size, so it is a bit of an unknown.”

until this shakes out, i don't expect the flight from quality to be very big at all. indeed treasury losses this morning are not nearly what they might be -- and, for all the relief in financials, the nasdaq 100 is trading about flat.

UPDATE 10am -- action in stocks has been surprisingly poor. nasdaq 100 futures had been trading at 1810 in premarket, opened at 1795 and are down to 1755 at this writing. perhaps that shouldn't be a surprise -- this isn't exactly, after all, good news -- and while bailing FNM/FRE may be necessary it is far from sufficient. what has changed is that the government will try to prevent the total demolition of housing finance (not to mention the extant international system of finance) that would result from a disorderly unwind of the GSEs. what hasn't changed is recession, weak and weakening bank capitalization, the direction of house prices, consumer retrenchment, and so forth.

looking at the resultant trading, ben bitrolff:

Yields are screaming higher across the curve as it suddenly becomes very very clear the US debt has at least doubled, if not tripled and more on this bailout. The US dollar is getting whacked across all major FX pairs. Commodities are catching a bid. This is not good for anybody.

some hyperbole, but watching treasury yields will be important in coming days. if the whole curve races higher, raising debt service costs across the economy, the whole adventure is a failure from an economic perspective even if it represents the least-bad alternative.

UPDATE 1130am: the NYBOT dollar index is actually strengthening, per the charting facility at, recovering from early weakness to reach new dollar rally highs.

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