An Emerging Deal?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1702.7	-1.6	-0.09%
Eurostoxx Index	2994.3	16.6	0.56%
Oil (WTI)	101.5	-0.9	-0.86%
LIBOR	0.244	-0.002	-0.92%
US Dollar Index (DXY)	80.64	0.374	0.47%
10 Year Govt Bond Yield	2.71%	0.03%
Current Coupon Ginnie Mae TBA	105	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are flattish after Citi missed and Coca Cola and Johnson and Johnson beat earnings expectations. The Empire Manufacturing Survey came in at 1.52. Bonds and MBS are down

The Senate appears close to a deal on the government shut down and the debt ceiling. The plan would fund the government through mid-January, and extend the debt ceiling until early February. Obamacare would remain largely intact, although Republicans were able to extract a concession that would force the government to verify that people are eligible for subsidies. Democrats also want to delay a tax on existing policies which is on Big Labor's wish list. This whole thing is designed to take the pressure off and allow the government to enter into budget negotiations. Another round of spending cuts is scheduled to take effect at the beginning of the year, with defense bearing the brunt of it. Of course the problem is not in the Senate, but the House. Will the requirement that the government try and prevent fraud in obamacare enough to get the Tea party onboard? We'll see. 

What date actually matters for the debt ceiling? The government says Oct 17, when the government exhausts its borrowing authority. The Bipartisan Policy Center estimates that sometime between Oct 22 and Nov 1 the government will be unable to pay all the government's bills on time. And Bank of America is saying that by Nov 15, default is more or less inevitable.

Surprisingly, T-bills make up only 13% of the $11.6 trillion in marketable debt outstanding, the smallest share since Eisenhower was president. This is due to the Fed's Operation Twist as well as government extending duration to take advantage of low interest rates. Such short supply has had the shorter dated T-bills trading with negative yields for brief periods of time. 

Speaking of T-bills, the 1 month T-bill has been getting hammered as we approach the debt ceiling, with the yield increasing from basically zero a month ago to 33 basis points a few days ago. It is heading back down, but it is worth keeping an eye on it. Investors are dumping the short end of the curve as major banks have been discussing which T-bills they may restrict as collateral for repo transactions. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

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