2-yr Treasury down 40 bps in a week

Treasuries have run like a scalded dog for the last 4 days, Fed Funds futures have gone from pricing in a 40% chance of a cut at the Oct 31 meeting to a 98% chance as of today, housing sucks, there are still festering problems in the commercial paper market, the big banks are trying to put together a bailout fund for SIV’s (I saw that one SIV went bust yesterday), oil is almost a 90 a barrel, Bernanke is now saying that housing may become a drag on the economy, banks are taking multi-billion dollar hits to earnings due to mortgage writedowns, this is starting to get interesting.

Word is that the big banks bailing out the SIV’s are not bailing out the real low quality ones, just the top of the trouble, so it won’t have that big of an impact, if any. To me, it’s a creative way to help their numbers during what will be a hard period for the financials. Bernanke is now saying housing will drag the economy? now? A little late. Anyway, the Fed can’t stop a recession either, so…

we’ve been off our duration targets for our FI portfolios this past week and needed to buy a ton of treasuries to get back. Needless to say we’ve seen some nice gains in a very short period of time. Article on bloomberg put it nicely: they were taking the least junkiest of the junk and bailing them out while the author questioned why the other banks did not put their name forward when this SIV was first announced.