Cyprus secured a bailout from its creditors; ending a week of financial panic that threatened to see the island nation become the first government to leave the euro zone. In the late hours of Monday morning Cyprus agreed to the outlines of an aid package, paving the way for 10 billion euros ($13B) of emergency loans to stave off the threat of default. The accord imposes losses that two European Union officials said would be no more than 40% on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second-biggest, which will be wound down. Europe’s stock market rallied on Monday and early Monday bolstered US stocks for a better open at 9:30. The Cyprus solution is the first time since the credit and debt crisis began in Greece in 2009 that bank depositors and stock holders are being forced to take losses; all shareholders and bond holders in the Cyprus Popular bank that will be closed. The deal will undoubtedly bring into focus the safety of deposits and bonds issued by other banks in the larger countries in the EU that are still facing debt issues (Italy, Spain, Portugal).
At 9:00 this morning on the Cyprus deal the US stock indexes were pointing to a strong open; early today it appears that today may be the day when the S&P 500 index moves to an all-time high at 1565. The 10 yr at 9:00 -7/32 at 1.96% +3 bp and 30 yr MBSs -9 bp frm Friday’s close. At 9:30 the DJIA opened weaker than it was trading in the pre-market futures, +26, NASDAQ +11, S&P +5; all of the indexes were over twice as higher than at the actual open. MBS prices at 8:30 -21 bp, at 9:30 -2 bps. Already today a lot of volatility.
There are no economic reports today but Fed chief Bernanke will be in discussions with IMF and BOE officials on lessons learned from the crisis. Hardly a topic that has much meat given the renewed increase in the EU over their banks and the Cyprus crisis. More bank issues now turning to Spain. Spain's government will impose heavy losses on investors at nationalized banks and hire external advisers to help it manage the banks' assets.
A number of key reports this week and Treasury borrowing $99B of notes at its normal monthly auction. No reports today; tomorrow Feb durable goods orders, and new home sales; weekly claims on Thursday and the final Q4 GDP data. Two indicators of consumer confidence this week; the Conference Board’s consumer confidence index and the final Mar U. of Michigan consumer sentiment index.
The Cyprus deal this morning has removed some of the safe haven concerns that drove the 10 yr note yield down briefly to 1.90% last Tuesday; this morning the 10 at 1.95% has pushed the note back over its 20 and 40 day averages. In the MBS market the 30 yr Apr FNMA coupon never did break above its 20 and 40 day averages (price). The outlook remains bearish, but not severe. The fixed income market is still tied to how the stock markets trade. As long as the equity markets continue to improve the bond market isn’t likely to decline in rates. On the other side; as long as the Fed is still holding its QE purchases there is little likelihood rates will increase much. Technically, the 10 has resistance at 1.90%, support at 2.00%; 30 yr FNMA MBS has resistance at 103.03 price and support at 102.00 (current price . Although a deal was reached to keep Cyprus from existing the EU, the reaction in the US and German bond markets hasn’t been much.