Bond Expert Tuesday Wrap: Frost Warning

Prices of Treasury coupon securities surged today as a confluence of sanguine circumstances combined to force buyers into the market. Economic data released this morning was bond-friendly, with PPI weaker than expected. More important was the weaker than expected retail sales report, which was the harbinger of a frost warning for all those green shoots which have received so much press of late.

The technical picture as defined by Treasury supply has improved. The Treasury is on hiatus before the next wave of supply crests. In addition to the dearth of issuance this week the Federal Reserve is an active buyer. As I noted in an earlier post they did purchase $ 7 billion in the belly of the curve today.

In my earlier posting on the corporate bond market I noted the heavy issuance today. Participants note that some of that issuance was rate locked and that would have entailed the purchase of Treasuries at pricing.

Similarly, some of the names in the market today might have received fixed and that would have required a Treasury purchase by a swap trader.

The action was out the curve today with particular focus on the belly. The yield on the 2 year note declined 3 basis points to 0.83 percent. The yield on the 3 year note edged lower by 6 basis points to 1.20. The yield on the 5 year note tumbled 10 basis points to 1.70 percent. The yield on the 10 year note declined sharply (9 basis points) to 2.77 percent. The yield on the investment grade Long Bond fell 7 basis points to 3.64 percent.

The 2year/10 year spread narrowed 6 basis points to 194 basis points.

The 2year/5year/30 year spread richened by 10 basis points as the Open Market Desk buyback and the corporate pricings had a salutary effect on the belly.

The bond-friendly inflation data inflicted damage on TIPS. The 10 year breakeven is now narrower than it was at auction time last week at 130 basis points (versus 131 at auction). The 5year TIPS suffered also and the breakeven narrowed by 4 basis points to 82 basis points. The Treasury will auction a 5 year TIP next week so there is a bit of indigestion (bond dyspepsia) as the supply approaches.

Tomorrow brings Industrial Production and Capacity Utilization. Each should be rather weak and should support bond prices.

On Thursday another weak set of claims data is on the docket and that should engender talk of another ugly labor report.

T.S. Eliot said that April is the cruelest month. I have a feeling that his words will see fruition in the upcoming reports, which should act as a late frost on those greens shoots sprouting putative recovery.

Corporate Bonds

3:11PM ET: The corporate bond market is on fire this afternoon. Spreads are tighter by 5 basis points to 10 basis points in industrials,TMT and bank and finance.

The Verizon (VZ) 10 year deal which it is my custom to follow is 15 basis points tighter at 310 bid.

One salesman chronicled the recent Conagra (CAG) 10 year deal which came less than a month ago at T+ 413. It closed yesterday around 360 bid and traded today at 340.

There was active issuance today. HCA (HCA), Emerson Electric (EMR) and Rio Tinto (RTP) brought deals which were received enthusiastically by investors clamoring for spread product.

Rio Tinto is a mid level BBB with a host of credit related stories attached to it. They were able to raise $2 billion in the 5 year maturity and $ 1.5 billion in the 10 year maturity. The bonds came with coupons of 9 1/4 and 9.35 respectively.

Mortgages, Swaps and Volatility

2:58PM ET: Swap spreads are narrowing across the curve. Two year spreads are tighter by 3/4 basis point at 57 1/2. Three years spreads narrowed 1/4 basis point to 54 1/4. Five year spreads are tighter by 1/4 at 59 1/2. Seven year spreads are 1 1/4 basis points narrower at 35 1/4. Ten year spreads are 1 1/2 better at 18 1/2. Thirty year spreads are motoring and are 4 basis points tighter at NEGATIVE 32.

The 30 year spread is outperforming the rest of the list. One of my sources suggests ( as he did last week) that the performance of the 30 year is driven by the needs of exotic desks to hedge positions. Other sources disagree and believe that the chief ingredient of the move is just investors needing duration. No one has successfully explained to me why an investor would prefer receiving swaps 32 basis points rich to Treasuries. I would have no capital left if I traded that.

Mortgage spreads are about two ticks wider to swaps.Originator selling has been light today. Hedge funds, money managers and the government have been chunky buyers.

Volatility is off sharply today for both short term and long term structures. Participants note that those who have not hedged this year have been rewarded as the market has been rather range bound. There is much volatility with in the range but ultimately the range has not been violated.

One final note on mortgage spread to put the spread move since the Federal Reserve announced it would buy MBS in some perspective. Spreads reached their widest point (measured versus the benchmark Treasury 10 year) in November at +220. By the end of December the spread was 165 basis points and by the end of January the spread had compressed to 140 basis points. The spread currently trades around 100 basis points. That is the current coupon versus the 10 year Treasury.

I think the spread will continue to tighten. The Federal Reserve has announced that it will buy $1.250 trillion of these things. Banks are buyers, as are the GSEs and a host of other investors.

One dealer suggests that net new issuance will total about $420 billion this year. (Once again that is net of refinancings.) That is only 1/3 of what the Federal Reserve will buy. Against that background it is hard to envision spreads doing anything other than narrowing.