Prices of Treasury coupon securities surged in overnight trading as the gargantuan writedown at AIG (AIG), in concert with the travails of Freddie Mac (FRE), reminded investors that the financial crisis is still running at full tilt nearly one year after it began with no end in sight.The overnight rally significantly favored the shorter maturities and the curve is quite a bit steeper. The yield on the benchmark 2 year note has dropped 6 basis points t 2.52 percent. The yield on the 5 year note has declined 5 basis points to 3.28 percent. The yield on the newly minted 10 year note has slipped 3 basis points to 4.04 percent and the yield on the Long Bond has barely budged and sits at 4.68 percent.

The 2 year/10 year spread is now 152 basis points. Last week when the Treasury sold 2 year notes that spread was in the low 130s. I favored the steepener at that point but I would now thank my deity and get flat for now.

AIG reported a huge and unexpected loss in Q2. Credit Derivatives cost them a cool $5.56 billion and Alt A mortgages hemorrhaged to the tune of $6.0 billion.

Economic data released overnight was mixed . UK house prices fell at a record rate in July and are now 8.8 percent below year ago level.

There was a ray of good news in Germany as IP climbed for the first time in four months in June.

In the US investors will look to the Pending home sales report for new information on the housing market and to the weekly claims report for information on the labor market. Technical factors allegedly bloated the claims data last week and it will be informative to see what this number looks like without the noise.

The Treasury will auction $10 billion Long Bonds today. They have cheapened rather significantly in over night trading. They have lagged the 2 year by 5 basis points and the 10 year by 3 basis points. If the street can force the outright level closer to 4.75 percent and hold the spread concession the auction should go quite well.

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John Jansen

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