RV Comment regarding longer portion of curve:

Recap:
1. DNH1 / DNM1 continues to trade somewhat expensive, DNM1 basis is fair
given FF futures ("new & improved" levels)
2. FNMA benchmarks and FHLMC reference notes from 1/09 thru 9/10 are
trading at attractive levels relative to Libor
- likely will not improve much before quarter end
3. USM1 and TYM1 basis:
a. USM1 basis closed cheap across the board (especially given FF
futures)
b. TYM1 basis continues to trade rich
4. GSE issues longer than 15 years contnue to suffer relative to Libor
(trading Libor plus 2 to 4)
5. FHLMC issued $2bn sub-debt 10yrs approx 22 over 10year FHLMC (approx
L+14)

Comments:
1. DNM1 vs E$ strips (swaps) represent very attractive risk/reward profile
- prefer E$ strips instead of swaps because of our opinon on
volatility and ability to discretely manage
duration variability of CTD of DNM1
- we have seen interest in this trade & variants of this trade
2. We view the UST 5.5 5/09 as expensive vs the TYM1, although FF currently
offer no protection against rampant Fed eases
3. We view the USM1 basis as cheap
- prefer owning "non-CTD" issues (e.g. Aug17s and Feb23s) rather than
'20 & '21 issues
- FF futures should provide reasonable repo hedges for these positions
4. FNMA anouncement (tomorrow) of new 10yrs - look for announcement on the
smaller side ... comparable issues trading L-9 or so, relatively expensive
funding for FNMA
5. GSE issues > 15 years continue to lag everything
- unless and until the curve helps out - and - liquidation of
positions acquired considerably above the market


WDC


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