At this point, the market seems split on the direction of spreads from here. Though the forward calendar of new issue supply will pick up this month as quarter-end approaches, the consensus is that the supply will be easily digested amid healthy demand for spread product and higher yields away from Treasuries. Accounts looking to add convexity to their portfolios may start looking at Agencies, credit cards, CMBS, wrapped corporates, or other well structured fixed income products as alternatives to treasuries. Many market participants will want to wait until next week to make any large bets, however, as a roundtable discussion about tighter Government regulation of the Agencies is held on September 12. The meeting could bring some interesting developments, as the contents of a letter sent to Mr. Baker by Alan Greenspan last week are scheduled to be made public at that time.
Investors are likely to remain cautious ahead of the pending news.
The pace of employment growth has slowed considerably when compared to last year. This implies the slowdown in the labor market may be temporary. New home sales remain at very robust levels and the stock of unsold homes is low. The manufacturing sector has deteriorated as well in Q3, mostly in the durable goods sector, though other sectors such as technology continue to be strong. The August NAPM index dropped below 50.0 for the first time since January 1999.