In 10 minutes time, Wall Street will underwrite $19 billion 10yr notes. In the face of this supply, a major topic on the agenda today is Wall Street compensation.
Secretary Geithner announced earlier today that the SEC would be involved in crafting “say on pay” legislation. This legislation will focus on trying to align risk and compensation, providing greater disclosure on compensation, and creating proper incentives within the financial industry. The devil will be in the details.
Make no mistake, though, the focus on this issue will serve to lessen overall compensation.
Will Wall Street send a message to Washington that they are not happy with this proposal? How might they do that?
Fade their bids on the 10yr auction. That is, lower the price on the auction thus charging Uncle Sam a higher rate of interest.
Check back shortly and I will report on auction results.
As of 12:55pm, the 10yr Treasury note is trading at a 3.95% rate, which is higher by approximately 5 basis points relative to last evening’s closing level.
Update: Auction Results and Market Reaction:
The 10yr auction did “tail” and was underwritten at a 3.99%. The “bid to cover” ratio was a very respectable 2.62 times. That said, the bidders priced in a healthy discount to buy these notes.
The higher Treasury rate will clearly have a knock on effect across all sectors of the bond market but especially the mortgage market. As rates move higher, the affordability of mortgages and housing overall lessens. To this end, mortgage applications fell last month.
Nobody on the street would ever open Pandora’s Box and openly confess to fading a bid on Uncle Sam. That said, I view today’s price action as providing a hint that the Wall Street crowd is not happy with Washington.
Wall Street will have another opportunity to express their displeasure tomorrow as Uncle Sam will be selling $11billion 30yr bonds.
How is the equity market responding to these higher rates? Earlier today the major market equity averages were higher by 1%. We have seen a complete reversal of that upward move and they are now down by 1% on the day.
Lots of hills, valleys, and undulations as we navigate the economic landscape!!