Good Morning. The originator friendly flight to quality that led benchmark interest rates 30 basis points lower last week is now being backed out of the bond market after financial and political leaders around the world this weekend coordinated an official global effort to "stop the bleeding" in the Eurozone.

From European Union Leadership...

After a meeting in Brussels lasting more than eleven hours, which finished in the early hours of Monday morning, the Economy and Finance Council (Ecofin) reached an agreement on a loan package of more than 500 billion euros allocated to cover the needs of members with solvency problems and to defend the euro.

The European stabilisation mechanism includes an aid facility to balance of payments to a value of 60 billion euros, with the Union's own resources as guarantee, plus 440 billion in funds or guarantees supplied by the Eurozone member states, as well as a quantity from the International Monetary Fund (IMF) to the value of at least half of Europe's contribution.

IMF Executive Board Approves €30 Billion Stand-By Arrangement for Greece

The Executive Board of the International Monetary Fund (IMF) today approved a three-year SDR 26.4 billion (€30 billion) Stand-By Arrangement for Greece in support of the authorities’ economic adjustment and transformation program. This front-loaded program makes SDR 4.8 billion (about €5.5 billion) immediately available to Greece from the IMF as part of joint financing with the European Union, for a combined €20.0 billion in immediate financial support. In 2010, total IMF financing will amount to about €10 billion and will be partnered with about €30.0 billion committed by the EU.

The agreed aid package will be added to the 110 billion euros that has been assigned to the rescue of Greece, which the Europeans and the IMF will begin to pay out immediately.


ECB decides on measures to address severe tensions in financial markets...very similar to programs the U.S. Federal Reserve enacted in the winter of 2008.

The Governing Council of the European Central Bank (ECB) decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented toward price stability in the medium term. The measures will not affect the stance of monetary policy.

In view of the current exceptional circumstances prevailing in the market, the Governing Council decided:

  1. To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
    In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected.
  2. To adopt a fixed-rate tender procedure with full allotment in the regular 3-month longer-term refinancing operations (LTROs) to be allotted on 26 May and on 30 June 2010.
  3. To conduct a 6-month LTRO with full allotment on 12 May 2010, at a rate which will be fixed at the average minimum bid rate of the main refinancing operations (MROs) over the life of this operation.
  4. To reactivate, in coordination with other central banks, the temporary liquidity swap lines with the Federal Reserve, and resume US dollar liquidity-providing operations at terms of 7 and 84 days. These operations will take the form of repurchase operations against ECB-eligible collateral and will be carried out as fixed rate tenders with full allotment. The first operation will be carried out on 11 May 2010.

Plain and Simple: because the market is stressed and borrowing costs are on the rise, the EU and IMF are supplying Eurozone members with loans and the ECB is buying Eurozone debt in the bond market to stabilize member borrowing costs and boost investor confidence....

Stocks are rallying as shorts are covered and new long positions are added ...whether or not this move is sustainable is yet to be seen but the Eurozone fiscal crisis appears to be finally receiving the "official" attention

Financials and Industrials are leading the way higher followed by IT and consumer discretionaries. The rally is broad based...

The chart below is 10yr TSY contract futures vs. S&P futures. You can see money being re-allocated from bonds to stocks.

The 3.625% coupon bearing 10 year TSY note is -1-01 (33/32) at 100-17 yielding 3.558%.

The pain isn't as plentiful for "rate sheet influential" MBS valuations. The FN 4.5 is -0-07 at 101-08 yielding 4.358%. The secondary market current coupon is up 3.6 bps to 4.328%. In slow trading flows yield spreads are considerably tighter as benchmarks sell off. The current coupon yield is 77 basis points over the 10 year TSY note and +75.4 basis points over the 10 year interest rate swap.   If 10 year note yields continue to rise we should expect to see servicers start shedding duration which would result in wider MBS yield spreads and localized price weakness in the mortgage market.