Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities have posted solid gains today as a variety of forces converge to drive bond prices higher (and with the inverse relationship between yield and price intact, yields lower).

Someone emailed me a story this morning that the HKMA had intervened to stem the rise of its own currency with a purchase of about $400 million. That entity is not the only one engaged in such an activity. Countries across the globe which are reliant on exports are busily engaging in the same activity.

Market participants report a huge flow of money into the Treasury market from the exporting countries. It is a Faustian bargain but it has worked for years. Maybe this time will be different in that the American consumer is tapped out and will not consume to the extent that he or she did in a previous period.

It might be the case that those consumers have been so damaged by recent events that it will take years to restore the status quo ante for consumption.

The corporate bond market saw huge issuance today and that issuance was a source of support for the Treasury market. The amount of issuance today would lead one to conclude that there was a significant factor at work on Friday in addition to position liquidation and that was the set up for the issuance we are observing this day.

That issuance comes with the unwind and that would benefit the Treasury market today. I guess the lesson to be learned is that one should not fade the Friday swoon.

There were other factors contributing to the strength of the Treasury market. For instance, the IBD Consumer Optimism Index came in weaker than expected and is back at July levels.

The weekend press was supportive as Larry Summers and the St. Louis Federal Reserve President were each in their own way bond friendly.

Rock star analyst Meredith Whitney provided bonds a boost and lent a soggy tone to the equity market with her downgrade of the mother ship, Goldman Sachs (GS).

The yield on the 2 year note declined 8 basis points to 0.88 percent. The yield on the 3 year note slipped 8 basis points also to 1.42 percent. The yield on the 5 year note declined 8 basis points to 2.26 percent. The 7 year note is the relative value superstar of the day as the yield on that instrument dropped 9 basis points to 2.89 percent. The yield on the 10 year note declined 6 basis points to 3.32 percent. The yield on the Long Bond fell 7 basis points to 4.16 percent.

The 2 year/10 year spread is wider by 2 basis points at 244 basis points.

The 10 year/30 year spread is flatter by a basis point at 84 basis points.

The 2year/5year/30 year spread began the day at 55 basis points and is currently 52 basis points.

Corporate bonds

The secondary market in corporate bonds is moribund. Very little is trading and what transacts, as was the case earlier today, trades on the right side.

However, the action is in the new issue market. I noted several deals earlier and that list has lengthened and the volume of issuance is quite heavy.

The main focus of the market is a huge deal from Budweiser. Earlier in the day the company had planned on offering 3s.5s and 10s. The company has since added a 30 year bond and total issuance size is said to be $5.5 billion.

The price talk is chronologically T+ 160, 185,210 and 220. In each instance that is about 20 basis points to 25 basis points cheap to outstanding paper. participants report that BUDs most recent 10 yeear was 190/180. The pricing for the 5 year here is in the middle of where the 10 year was trading.

Dealers report solid interest and expect the deal will perform well.

Barrick Gold (ABX) has also announced and is offering a 10 year and a 30 year.

As an aside,the heavy and unexpected issuance today would have added to the selling pressure on Friday as rate locking is likely for a lot of this stuff.