12/10/2007

T-Bond trading comment (December 10, 2007)

The other day, the market was too pessimistic about the future of the economy... Now it seems, that we are too optimistic... For a fourth consecutive day, the T-Bond went tumbling down as market participants re-adjusted their view. Every day, we now hear some positive news (MBIA receives cash injection from Warburg Pincus, Soc Gen takes 4.3Bn SIVs on its books without affecting its capital ratios) and the only bad ones we hear are transformed into good ones ( We are thinking UBS). In addition to that, we had all that talking about long term inflation over the week-end and how this should send fixed income instruments lower...

In any case the market looks bearish in terms of price, but the recent drop seems rather too abrupt... The fall as been so fast that our daily elasticity model went from overbought a week and a half ago to almost oversold. In fact, we had bids at 114-02 to buy the market for a jump the other way. We did not go that low but the market maybe needs a little breather before resuming its downmove.

Tomorrow is FED day as we talked earlier. Market is pricing 25 bps rate cut but people are also looking to see if the Fed will cut its discount rate by 50bps... This would be a way to help the liquidity crisis without lowering the overnight rate by too much....

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