Say What You Mean. Mean What You Say

I have long been critical of government interference during this financial crisis. Although some kind of government intervention is necessary (as little as is practical), it seems as though Federal officials cannot go a week without a market roiling gaff.

Today, FHFA (GSE regulator) chief James Lockhart said in a statement that GSE bonds are "explicitly guaranteed" by the government. This sent GSE bonds prices higher. His statement was consistent with various news stories, including one earlier this month in Barrons. I called foul on that story as the GSEs' charters have not been altered to make their debt explicitly guaranteed by the government. Lo and behold, Mr, Lockhart had to retract his statement and admitted that there is no explicit government guarantee of GSE debt. Silence is truly golden.

There is a quandary among fixed income market participants. Being debated is whether long-term rates will remain low due to the flight to safety (which I believe have a way to go yet) or will the new supply of government debt and dollars cause lobg-term rates to rise?

Currently, the flight to safety is winning the tug-of-war versus new treasury supply and the printing of more dollars. As foreign economies follow the U.S. economy into what could be a deep recession, the flight to safety could prevail over increased supply. When the economy stabilizes and signs of recovery materialize, then the results of increased debt issuance should begin to push long-term rates higher. However, for now, safety is the strategy du jour.