The huge jump in short-term rates at the end of 2009 has partially reversed course. The 48 basis point rise in 2-year yield from 66 bps to 114 bps in the month of December alone was truly impressive. Record issuance crammed into the end of the calendar year proved to be difficult for the thinly staffed trading desks to take down. Nothing changed in terms of expectations for future Fed tightening during the period, which left the door wide open for gains as 2010 trading began.

The reversal in the intermediate part of the curve was less pronounced, so I won’t post a graph for the ten-year, but the movement back down in the two-year has brought the benchmark curve (2-10 spread) to historic highs. Regardless of whether you think the steepness is keeping banks profitable enough to offset their real estate problems or fueling a move toward future growth for the overall economy, the shape of the curve is a major player in the market.

MBS Purchases

I know I have written about the Fed’s MBS purchases a lot, too much probably, but the path to ending the program seems pretty clear cut now.

Using a 5-week average, the end of the program is projected to be mid- to late-March, which is right in line with the Fed’s publicized expectations. This past week jumped to $14mm, a good bit higher than the $9.3mm and $12mm the Fed did the last two weeks, which was mostly due to the shortened trading weeks and sensitive market. I expect purchases to stay steady at around $13mm from now until the end.

Random thought…

This blog post from The Big Picture made me think what else the Fed could be doing without any public disclosure.

Have a good weekend.