Credit Jitters

Leading into last night, the market seemed to have found and bounced off the bottom of the 50/70 range again and there waiting for a night of no significant data (Business Inventories) but in which Bernanke was going to speak on inflation to some academics. I was set up moderately long from buying at the bottom of the range.

Of course, I had no idea that the ratings agencies were going to decide to put a range of MBSs and CDOs (involving the subprime sector) on notice for downgrades. This caused a big rally in UST and dragged our 3s and 10s to the top of the range again only 2 days after it had pretty much toughed the bottom.

This is a concern and I think the market is reasonably likely to break the range this time in the US and subsequently drag our 10s along with it. Of course, our 3s and especially our Bills will be restrained due to domestic issues (employment figure on Thursday and CPI later in the month determining whether the RBA will hike) but in the meantime, our 10s will basically be free to swing and in the event of a large and/or sustained move, the rest of the curve will follow to some extent.

The consensus seems that the employment number will be low this time around and I'm ok with that but for the fact that I am now a bit shorter in the long end (sold 10s into the rally) and, as I type, 10s are testing the top of the range again. If the number does print low, then, seeing as we are presently positioned at the top of the range, it is likely to extend the move.

I would be much more comfortable if the long end in the US sells off tonight, taking 10s back to the mid-high 70s and then we had a low employment print. I'm happy to stick with what I have though because I can't see the market pricing in too much from tomorrow's number with CPI looming in 2 weeks. I also reckon that, even with the sub-prime woes and the credit events of yesterday, the next wave of news on that issue will come further down the track and the market will have a chance to bounce around the range again.

If I'm wrong, then I'll buy back the tens and square up that side as the market finds a new range. That'll probably be somewhere up near 90 though.

Still no news about the management situation at work. I doubt anything concrete will come to light until the bonuses are announced and probably paid out.

Position: Slightly short, mostly in the long end.

Best case: Steepening rally, such that 10s sell off. Employment prints low, credit woes in US abate.

Worst case: Flattening sell off. Employment prints very high (people regain some confidence in 2nd hike) and 10s actually rally finding a new range or worse, trending upward (people start believing in a US easing on maybe the back of credit jitters).