Treasury Spreads Tightening…Again

The “Twist” isn’t even here yet but expectations are hitting the curve hard…below is a chart of the spreads tightening since August 1st. The 2s&30s dropped 20 bps just yesterday after the FOMC release.

We aren’t sure of the reasoning for the huge sell off in equity markets yesterday and we’re not so sure the market was even sure. Any rational person(though the market is irrational) doing a probability weighting on what was going to happen yesterday couldn’t have prescribed more than a 10% chance of additional QE in the form of actual bond buying rather than a duration shift.  It seems the Twist should have been a foregone conclusion and with a few fed dissenters the last few meetings is it any wonder there was no outright QE?

There was some chatter over at zerohedge yesterday about  this move not being good for banks.  The basic premise is the old adage of “Borrow Short, Lend Long”. A flatter curve means there’s little room for banks to exploit a large spread between short and long interest rates(see chart below). The primer below should get you up to speed on the topic. (surely not the best explanation, but good enough).

http://www.fdic.gov/bank/analytical/fyi/2006/022206fyi.html

In other news, commodities are getting hit HARD this morning, gold, silver(down 10%!), oil across the board down 5%. On silver we’re looking to “buy the dip” but might wait it out today to see what happens. Fundamentals are unchanged from yesterday.

Since 8/1…

-Spread on the 2 & 10 year have dropped 72 bps from 2.39 to 1.67

-Spread on the 2 & 30 year have dropped 84 bps from 3.69 to 2.82

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