Bond Expert: Friday Wrap

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Includes: APX, BBK, C, GE, GS, HCA, JPM, TLO, WFC
by: John Jansen

Prices of Treasury coupon securities took a solid and substantial drubbing today. I have noted rate lock selling in corporates several times today. In phone calls in preparation for this closing post sources report that the municipal bond market has played a part in the Friday debacle, too.

Early in the week I wrote about a large California deal. That deal was originally discussed as $3 billion or so. Talk today was that it would be substantially upsized to something between $5 billion and $10 billion.

Separately, there is a New Jersey deal in the works. Supposedly that deal is being increased from $1 1/4 billion to $4 billion.

Economic data provided no cover for the shrinking herd of bond bulls. The University of Michigan Confidence survey is still very depressed but it posted a small gain to 61. That is another small sign that a modicum of stability is returning and supportive of the thesis that the darkest days have passed.

The yield on the 2 year note climbed 6 basis points to 0.96 percent. The yield on the 3 year note increased 7 basis points to 1.34 percent. The yield on the 5 year note surged 11 basis points as did the yield on the 10 year note. Those securities yield 1.88 percent and 2.94 percent, respectively. The yield on the Long Bond increased 6 basis points to 3.79 percent.

The 2 year/10 year spread widened 5 basis points to 198.

The belly of the curve gave up quite a bit of ground today as the 2 year/5 year/30 year spread narrowed to 99 basis points from 107 basis points at the close yesterday.

Mortgages and Swaps

Swap spreads are wider across the curve.Two year spreads are wider by 3 1/2 basis points at 60 1/2. Five year spreads have widened by 2 3/4 basis points at 59 3/4. Ten year spreads have leaked 2 1/2 basis points to 17 1/4. Thirty year spreads are less inverted by 3 1/2 basis points at NEGATIVE 32 1/2.

I mentioned rate lock selling earlier in the day as a reason for some of the spread widening. There was also some chunky paying by end users in the long end.

Separately, and a little surprisingly, one salesman noted concerns about the quality of Citibank (NYSE:C) earnings as a source of angst.

In that regard, I did have several conversations about stress test results and the effect news of those results would have on the market.

In unison, participants felt that if several firms flunked it would be cathartic. The logic is that the government would take them over and all would be well. Those left standing would be by definition healthy. That is the logic for now.

Citibank stock was off a little more than 6 percent the last time I checked.

Mortgages are lagging swaps by about 6 ticks.

Corporate Bonds

2:41PM ET: The appetite for risk product continues and is seemingly unquenchable. Secondary paper is on fire and spreads have ratcheted in by another 5 basis points to 10 basis points. One salesman suggested that it is closer to 10 basis points than the 5 basis points.

There has been a marked change in attitudes and a synthesis of several conversations suggests that this was a bit of a landmark week in the financial crisis. The JP Morgan Chase (NYSE:JPM) deal which came yesterday at T+ 350 (currently 330 bid) would have traded closer to 500 basis points two months ago.

Earlier in the week HCA priced a junk deal and that deal would have been impossible in the recent past. One portfolio manager with whom I converse noted that most investors are flat or underweight the sector and if investors decide to charge to the other side of the boat simultaneously then this rally has the opportunity to flourish.

With the improvement in financial markets one syndicate desk trader opined that more financial names would try and tap the market. He thought that bond issues from Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS) were a strong possibility.

General Electric (NYSE:GE) is another name which could visit the capital markets.

Citibank (C) printed better than expected results this morning but corporate bond aficionados thought that issuance by that entity was unlikely and that new issue pricing for a stand alone deal would be so cheap as to represent an admission of defeat. For now Citibank will be better served with the embrace of the FDIC in the 3 year sector.

For the record secondary market Citibank paper trades around T+ 550.

In the new issue market Gazprom sold $2 1/4 billion 10 year bonds which are puttable in three years. The issue carries a 9 1/4 coupon.