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