Some fixed income learning

Here's a link to the site created by SIFMA for those intrigued/interested/enthusiastic about bonds :)

http://www.investingbonds.com/

Corruption+Derivatives+Munis = big blow-ups

Municipal Bond market is not as 'safe' a haven as I thought it was..paybacks to politicians, entanglement with Swaps and other derivative products without due dilligence, have all but resulted in increasing credit risk of municipal bond issues. Heard that few counties are on the verge of going bankrupt after interest rate swap deal went bust recently..for more, here's the scoop
http://www.nytimes.com/2009/01/09/business/09insure.html?_r=3&ref=business&pagewanted=all

More on treasury convenience yield..

I found this interesting abstract as a follow up to where I ended the previous post on treasury convenience yield

The convenience yield diferential between on- and off-the-run Treasury securities with identical maturities has two components. A non-cyclical component may arise due to the higher illiquidity of off-the-run bonds. Also, trading in the market for the next issue often causes cyclical shortages of the on-the-runs. When this occurs, owners of the on-the-run bond can earn riskless profits by borrowing at a special repo rate while lending at the prevailing risk free market rate...

for more, http://neumann.hec.ca/pages/eric.jacquier/papers/abs.repo.rdr04.html

Update on TED spread

TED spread, which is the difference between LIBOR and 3mo treasury bill, has narrowed to 1.33% today - a great improvement from all time high of 4-5% that it was around october. While this reflects lower percieved credit risk of lending to banks, it's still very high compared to the normal average of 20-40 bps.

Also, I recently read about "convinience yield" on Treasury bonds. Little did I realize that it was something to do with special repo rates..yet to confirm but I'm guessing it's the difference between Special and GC (general collateral) rates. When Treasury dept. issues new bonds, they trade at a slight premium compared to just-off-the-run securities due to higher percieved liquidity. This bestows the specialness.

Yield curve as an economic indicator

It is generally perceived that inverted yield curve signals a looming recession, as long term yield is lower than short term yield. The subsequent recovery is foreseen when the yield curve steepens. This may have been true to some extent in the past, but the current economic scenario calls for a reassessment of this belief.
Yield curve is not as much an economic indicator as it is an indicator of fed funds rate. Steepening yield curve only signifies lower short term yields. Since fed can't possibly target below zero, long term yield has to be higher than the current short term yield. It is not a pointer of economic health, in fact, Japan for a long time saw a steep curve throughout the downturn. So to think that US is getting out of recession soon because the steep yield curve indicates so is of questionable logic.