Economics: A government accounting change leads us to revise our FY09 deficit lower. However, revenue trends are worsening, and we now look for a notably larger FY10 deficit.
Treasuries: The Fed has bought $100bn of Treasury securities under the asset purchase program. We discuss the higher-than-expected rate of purchase, switch toward longer-term securities, and increased appetite for cheap issues on the curve.
Inflation-linked markets: The new and just off-the-run 5y TIPS are still at a significant premium on the curve, and we find these overvalued in light of increased breakevens and market risk appetites.
Swaps: Supply-demand dynamics in short-term markets argue for continued compression of the LOIS basis, and the market-implied path seems a little gradual. Along with reducing the scarcity premium for Treasuries, this argues for continued compression of 2y spreads.
Agencies: Fannie Mae and Freddie Mac posted large 1Q09 losses, due primarily to credit loss provisions on the guarantee books; we expect this pattern to continue. Raised debt limits should provide the GSEs flexibility to term out debt, although portfolio growth will likely be muted.
Futures: We expect the FV and TU rolls to cheapen, while TY should richen for a combination of fair value and technical reasons. We also expect rolls to occur quicker and faster, with the bulk of open interest moving in three days in most contracts.
Money markets: Activity in the specials market has dried to a trickle. Now that specific, in-demand Treasury securities can trade at sub-zero rates, will the specials market recover?
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