As we indicated, a deterioration in Treasuries was the likely outcome of affirming the implied Federal backing of Fannie and Freddie debt. And as we said, we might have been able to persuade our friendly creditors, meaning foreign central banks who also own a lot of Treasuries, that they’d likely be no worse off from a restructuring of GSE debt that involved a modest haircut (or equivalent via a reduction in yield). Too late for that now.
The cost of protecting against losses on Treasuries soared to a record on concern that the U.S. government faces higher liabilities with its support for Fannie Mae and Freddie Mac, credit-default swaps show.
Contracts on U.S. government debt increased 2 basis points to 22 basis points at the close of trading in London, according to CMA Datavision, after earlier reaching as high as 24. The 10- year contracts exceeded a previous record of 20 basis points yesterday. Five-year contracts were unchanged at 16 basis points, according to CMA….
Don’t underestimate the significance of this move. As jck at Alea noted:
In normal times, the spread is less than 2 basis points.
Back to Bloomberg:
“The market is starting to look at the senior debt of the GSEs as approaching full-faith-and-credit obligations of the U.S. government,” said Ken Hackel, managing director of fixed-income strategy at RBS Greenwich Capital in Greenwich, Connecticut. “That is a large book of debt to effectively transfer to the U.S. balance sheet and increase the government’s liability.”
John Jansen gave a longer-form report at Across the Curve. Note the Treasury price deterioration is at the long end of the curve:
Prices of treasury coupon securities posted disparate results today. It was a tale of two markets. The yield on the 2 year note tumbled 6 basis points to 2.39 percent and the yield on the 5 year note dropped 6 basis points also to 3.11. It gets a little less festive in the longer maturities as the yield on the 10 year fell one just basis point to 3.85 percent. The Long bond traded as if it suffered from some dread social disease and the yield on that fabled and storied instrument jumped 3 basis points.Many market participants have cast their verdict on the Bernanke testimony and the judgment is that it was decidedly dovish and lacked teeth regarding inflation. I personally think the bigger problem is keeping the system afloat but if I give the inflation hawks their due headline PPI has been up 1.8 percent in June and 1.4 percent in May. I wonder if the Weimar Republic measured inflation at the core level. That level of inflation can not be comforting to someone holding a 30 year bond with a yield to maturity of less than 4.50 percent.