T-Bond trading comment (September 11, 2007)

We had a breathing day today, after two days of heavy trading to the upside. Liquidity was not very good all day. We opened this morning with bearish intentions but this was quashed at 113-21 (This level would actually turn out to be a support for the rest of the day). Afterwards, we drifted aimlessly while waiting for Bernanke. His speech had a bullish impact on the market but he basically just repeated what has already been said for the last few weeks. Like yesterday, the upswing got stuffed at 114-05. From there on, we started to go lower on very low volume. Again we touched the 113-21 level before bouncing back up to the 113-27 area.

The behavior of the T-Bond has been a bit peculiar over the last two days.... It is as if some heavy curve flatners were put on and the market rather well supported in comparison of the T-Notes 5 and 10y. The problem is that we are not hearing anything about curve flatners being put on. Another alley is that pension funds are buying longs bonds to match their maturity and getting the hell out of riskier investment while the loss is not too nasty.

On the news front, we had a rather ok day. Equities in Europe and Asia showed healthy gains and the US followed the same path when it was its turn to play. Credit indexes (Itraxx and CDX) stayed flat to a bit tighter and the Libor tightened again ! We will see if the market can sustain good news/momentum for two days in a row...

Talking about the current liquidity crisis, we just brushed the positive side of the picture so let's dwell a bit on the darker side to be fair. On the negative side, we still have serious problems inthe commercial paper market (ABCP included). It is rumoured that up to 700 bln comes to maturity this week. This could put a lot of pressure on the Libor as well as on the balance sheets of banks that could find themselves in the obligation of taking some off the balance sheet items on their balance sheet... Hello funding/lending activities. The Libor US might be fixing lower but have you looked at the Libor CAD ? Not pretty. Finally, housing sectors is still underpressure with Countrywide rumoured to be in need of more cash after Bank of America's infusion. In addition to that, we had our first subprime casualty in the UK where Victoria Mortgage announced it is going into administration. If the subprime crisis transports itself to Europe, it could get really nasty...

By the way, our elasticity index seems to be getting a bit overextended so it would not be surprising to see the T-bond head lower... But let's wait and see for now...