Houghton and Atkeson

Watching the Treasury's Actions

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Editor's Note: While Sam Collins is on vacation, we've asked Nick Atkeson and Andrew Houghton, editors of Big Money Options, to provide you with a comprehensive market outlook and a trade of interest until Sam returns June 1.

At the 30,000-foot level, credit availability has improved greatly. Earnings revisions continue to rise. International economies, such as China, Taiwan and Germany, appear to have stabilized.

But on Wednesday, none of the global macro issues mattered. What mattered was growing concern in the bond market regarding the Treasury's plans to auction $26 billion of seven-year notes. Equity investors saw the 10-year Treasury rate rocket up through 3.60% and the bonds plummet. 3.55% was the "Street talk" level. Rapidly rising Treasury rates have historically been a negative for the equity market.

Mortgage debt trading desks added fuel to the fire by hedging their MBS portfolios by selling the long-end of the Treasury curve. Many debt players have been naked long MBS in 2009.

Bank portfolios were negatively impacted with 10-year Treasuries rising as they were sitting on unrealized MBS gains they had hoped to recognize in the second quarter. With the long-end of the curve going higher, those gains are evaporating which could show up in the Q2 earnings reports.

A troubled seven-year note auction is anticipated today so a good auction could prove to be a very powerful positive catalyst. So far this week, the two-year and the five-year auctions have gone well.

The S&P 500 (SPX) closed at 893.06, down 1.90%. The Dow (DJI) was down 173.47 points, or 2.05%. The Nasdaq (NASD) closed down 1.11%. The CBOE Volatility Index (VIX) closed at 32.43.