Recap 9-21-11

Main Items:

  • FOMC announced a 400bn sized operation twist. IOER was not cut. Also, MBS paydowns will now be reinvested into MBS instead of into Treasuries. Maturity targets for Operation Twist:
  • 6-8 32%
  • 8-10 32%
  • 10-20 4%
  • 20-30 29%
  • TIPS 3%
  • Moody’s downgraded US Banks:
  • BAC to Baa1 from A2 w/negative outlook. BAC CP was downgraded to P-2 from P-1.
  • Citibank downgraded to P-2 from P-1. Long Term debt outlook negative.
  • Wells Fargo downgraded to A2 from A1
  • Canadian Core CPI jumped to 1.9% YoY in Aug vs 1.6% exp and prev. StatsCan noted that the monthly rise in core CPI "was mainly the result of price increases for the purchase of passenger vehicles, electricity, homeowner’s home and mortgage insurance, telephone services and jewelry."
  • US Existing Home Sales improved to 5.03mm in Aug vs 4.75mm exp
  • IMF released a report saying that EU banks have as much as 300bn in credit risk. The IMF said banks’ “spillover” from sovereign debt alone amounts to about 200 billion euros. Adding banks’ holdings of bank assets whose value has also fallen in the crisis countries brings the total as high as 300 billion euros.


  • BoE minutes were dovish, despite an 8-1 vote. “For most members, the decision of whether to embark on further monetary easing at this meeting was finely balanced since the weakness and stresses of the past month had significantly strengthened the case for an immediate resumption of asset purchases. For some members, a continuation of the conditions seen over the past month would probably be sufficient to justify an expansion of the asset purchase program at a subsequent meeting.”
  • Norgesbank kept policy on hold @ 2.25% as expected.
  • A Greece Government official said that the country will cut pensions over 1.2k a month by 20%, and place 30k employees in labor reserve.


The size of the 20+yr target was larger than expected, as most brokers expected that the bulk of the purchases would occur in the 10yr sector. As a result, the 30yr was the biggest mover on the curve. Going forward, we should adopt the same assumptions as the Fed and look at the 30yr as the new marginal policy instrument. Also of note is the Fed’s decision to re-engage the MBS market. This caused a 25bp drop in the 30yr FNMA current coupon. With the spread between the current coupon yield and 10yr Tsy still over 100bps wide, we can probably see a further 25bp contraction, which will take us to the post 1Q09 average.
Finally, the fact that no IOER cut was announced drove a 5bp sell off in the white Eurodollar strip. I would expect that a cut would only materialize if funding costs really starts going up. In the mean time, there are a lot of potentially undesired consequences from an IOER cut that the Fed probably doesn’t want to touch.

Also, note that pretty much every bullish reason to buy gold was in place today: more QE, lower yields, crashing equities, banks getting downgraded. But yet gold still sold off. What does that tell you about its near term prospects?


One thought on “Recap 9-21-11

  1. ………..and a massive dump in copper today as the LME 3M benchmark is nearing the key 8000 support level.
    Copper was already going down like an elevator most of this week and yday’s Fed action made it drop a further 280 $ this morning in London.

    Mostly on bearish economic news and renewed fear of a China slow down.

    Against that: total phys stocks in copper are in order of 4 weeks global demand and the phys output of the metal is not exactly keeping up with phys demand growth y-o-y. So tightness on the back of strike actions, natural disasters, mine accidents,etc is a real concern and therefore , IMHO at some point going long copper futures such as DEC13 is a solid position to have if we get to 8000 , or much lower.
    Note the fward curve into ’12 and ’13 is quite flat so you hardly pay more ($40?) than the 3M copper price for a 27M(onths) maturity.

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