What Matters Today

In my opinion, two very important indicators of the problems in the credit markets will be released today. The Fed will initiate its TSLF, a 28-day swap of treasuries for MBS. The results of this auction will be extremely important as it will illustrate the severity of the financing problems of the banks over quarter end. The Fed is set to auction $75 billion. If the auction is a success, this is very good news for the fixed income markets and spreads should tighten between treasuries and agency mortgages, because it will be an indication that the Fed has the firepower to control the problem. If the auction is not a success and spreads in the repo market remain wide due to hoarding of treasuries out of fear, it is an indication that the problem is too big for the Fed to fix. I will be waiting for the results to be announced and will hopefully be able to interpret them. If the news in the money markets is bad, I don't believe that the financials can rally.
The other bit of important news should be an update on the situation surrounding Thornburg (TMA, which I have covered extensively in earlier posts.) Although some may wonder why the future of a nearly bankrupt mortgage REIT matters, I believe it is a very important indicator of market psychology. If TMA cannot raise $700 million for the balance of the private placement (yielding 18% and offering the purchasers 48% of the equity at $.01) then the repo lenders will be forced to seize the assets of the company and liquidate. Again, the last thing any bank or broker needs right now is more assets, particularly over quarter end. Furthermore, these assets are alt-a mortgages which face the prospect of deteriorating significantly if the housing market worsens (which appears inevitable.) If these two important events fail today, I think the market could sell off significantly. Otherwise, maybe I'll start to believe all those pundits last weekend who came out and announced that we'd seen the bottom.