fixed

A week ago Zero Hedge discussed the spread between the Freddie 1 Year ARM and the 30 Year fixed, concluding that the recent record spread is indicative that the Fed will do all it can to become the new subprime lender of any resort, even if it means creating exponentially more roll risk, as it seeks to lend money regardless of the probability of ultimate payback. Today Bloomberg points out that the Freddie 30 Year has just hit a 4 month high of 5.14%, a level last seen at the end of August. What is notable is that in less than two weeks the 30 Year Freddie Fixed has jumped by 20 bps. At this rate we will overtake the 2009 high of 5.59% within a month. However, our original observation is that even as the 30 Year Fixed has finally started to move in line with the 10 Year Treasury, which just can't find a floor in the past week, the 30 Year Fixed - 1 Year ARM spread has simply exploded: when we looked at its last it was 60 bps, a week later, it is now at 81 bps. The Fed is now literally throwing money away in the form of Adjustable Rate Mortgages.

Here is the only math you need to know as we all look at 2010: in 2009 US Dollar denominated fixed income supply, net of the Fed's Quantitative Easing operations, was $190 billion. In 2010 it will be $2,060 billion, an eleven fold increase. The Fed has three choices: 1) a QE 2 announcement soon, causing a plunge in already low Democrat popularity ahead of the mid-term elections; 2) interest rates skyrocketing, throwing the economy into a true tailspin; 3) the mother of all engineered equity crashes to return capital flow to risk-free assets. None of the three is a pleasant choice, however the Fed could only delay the inevitable hangover from the biggest private-to-public risk transfer in history for so long.

We have a lot of fresh Treasury supply coming in this week. The last 30-Y auction put an end to a series off auctions that were coming in better than expected. However, as we had warned before that last long bond auction, the expected yield below 4% had the potential to trigger some retaliation by real money investors. Sure enoguh the scenario played out and since then yield have backed up towards 4.30%. Also as pointed out last week 3.50% on the 10Y is a relatively key psychological level.

Developing story, but, surprisingly, not a dollar negative for once.

It has been confirmed that Chris Sullivan, (curiously still with a green light on his Bloomberg profile) is taking the Ironclad parked in the dodecatuple secret bottom basement of 32 Old Slip, and will sail the East River all the way up to Boston where he will be joining Fidelity as president of its bond fund. Sullivan is moving on up in the world, not just in a purely magnetic north sense, as at Fidelity he will oversee more than $170 billion in bond assets.