<p>MARKET STRATEGY AMERICAS<br/>Rearranging the deck chairs on the Titanic<br/>Economics 3<br/>As expected, the recession is rotating out of the consumer, into the business sector.<br/>The fiscal stimulus package should keep consumption in positive territory in Q2, but the<br/>pace of decline in business spending is still accelerating.<br/>Rates Strategy: Credit where credit is due 5<br/>We expect credit creation to remain tepid at best for most of this year, which should<br/>weigh on growth and keep the Fed on hold.<br/>Rates Focus: Supply pressures to persist 8<br/>Duration supply should remain high, implying a steeper curve and supply pressures<br/>should shift to the intermediate sector in Treasuries implying tighter spreads.<br/>Treasuries: Forecast update 11<br/>We expect short rates to rally over the next quarter; while longer rates will likely be<br/>rangebound in the near term, supply should win the tug of war in that sector over time.<br/>Money Markets: Tri-party repo concerns 12<br/>The Federal Reserve has grown increasingly concerned about tri-party repo and is now<br/>hinting at the establishment of a central bank-sponsored central clearing counterparty.<br/>Agencies: No way out 15<br/>FHLMC posted a $24bn 4Q08 loss and requested a $30bn equity infusion from Treasury.<br/>FHLB Seattle bank reported that it is noncompliant with its risk-based capital requirement.<br/>Inflation-Linked Markets: Predicting history 18<br/>US real yields are attractive and we recommend longs in the 7-8y sector. Here we use a<br/>real yield model to estimate historical 10y real yields back to 1973.<br/>Swaps: Libor-credit trumps demand-supply 21<br/>Till bank spreads show signs of reversal, we would be very wary of fading the wideness<br/>in Libor, despite strong fundamentals.<br/>Treasury Futures: So what is DV01, anyway? 24<br/>CTD forward DV01/conversion factors are likely to underestimate the rate sensitivity of the<br/>futures leg of an invoice spread or a conditional spread trade when front-end rates are sticky.</p><p><br/></p><p></p>