Speculation about bank nationalization is the market’s fuel, in either direction. Treasuries may fall on the news of a takeover because for one, they are the funding, and two, they may be less valuable due to what the capital is spent on. The market waits for signs about how much help the government will lend banks and while financials so understandably drag the market down, treasuries don’t get their normal flight to quality bid when more issuance will be needed to fund what lies beneath those falling stocks. Treasuries can’t get flight to quality support when the cost of supply keeps getting higher.

The inspiration for today’s market moves began when it was announced before the start of Asian trading that Citi had approached the government for help. The “help” would consist of a conversion of some government-owned preferred shares into common shares. This would help Citi raise some temporary capital but is preferential to another step in the direction of nationalization.

The treasury market is heavily weighed upon by this week’s issuance and headlines that there will be $15B given to states this week to help with healthcare. $61B of 3 and 6 month bills will be auctioned today and a total of $94B of 2, 5, and 7 year notes will go on the block this week. The market is anticipating more issuance as rescue plans get thicker. The flow of negative news has been supportive for the long end of the curve but this may end up being an opportunity to initiate a steepener after the flow of shorter-term supply is absorbed as short end prices under pressure may alleviate and/or the long end will realize it has to pay too.

To get back to the idea of help through conversion of preferred stocks, this week government officials have said they will put banks through stress tests this week and support the banks that fail through issuance of convertible preferred shares. What is a stress test? Do we not already know the answer? I’m curious to see if there will be a definitive outcome to this. Stay tuned to the blog this week.