Spreads Tighten On Treasury/Fed Moves

A: Noah back here. The discussion that I linked out to on Sunday intrigued me because of the reference to the spread between FNMA paper and 5 Year Treasury yields. This spread is an indication of risk and health in the debt markets. Historically, the spread is about 50 bps, but when the markets get ancy and nervous, it widens. With Freddie's $3Bln auction set for today, it does matter how the debt markets receive it! Lets take a look at what happened to this spread now that the Treasury & Fed announced their moves to back Fannie & Freddie.

From Sunday's link out, I added this chart which shows you the 101 bps spread between FNMA 5 YR paper and 5 YR Treasury Yields BEFORE the announcement from the Treasury & Fed:

Now, take a look at this same spread as of 9:20 AM this morning AFTER the announcement from the Treasury & Fed:

The spread has tightened some 23 basis points already. Clearly a sign of easing distress. However, is this going to last or is it just another band-aid on a gunshot wound? The discount window being open to the GSE's doesn't mean they will tap this source of lending. It is just there. As I said yesterday when the actions were announced:

The actions here are directly focused on restoring investor confidence, and I think both the debt markets and the equity markets will react favorably tomorrow. If it does, stock markets will rally back as financials get a bid, and the spread between FNMA and US treasury (101 bps) that I just discussed earlier today would tighten.

Now, lets see if this lasts or is just delaying the inevitable for a later time.

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