Sub-Prime to Sink More

This morning, S&P placed 612 U.S. subprime RMBS classes on Watch Neg and announced methodology revisions. A teleconference was to be held by S&P at 10am. According to UBS, "The vast majority of the issues put on Watch Neg are in the triple-B category, although Watch listings extend even into some double-A tranches."

This could partially explain the huge rally in treasuries today while spread product, such as corporate issues, have faded and spreads widened. Look for more fallout in the months to come.

Strategy Update. We have partially reversed our bullish commodity bet at the close today in the Dynamic Commodity Strategy. Performance has been solid over the past year up +13.5% versus a decline of the Rydex Commodity of -15.0% for a positive spread of 28.5% (see chart).