Bond Expert: Thursday Wrap

Written after the close on 5/1/08.

Prices of Treasury coupon securities slumped sharply today as a powerful equity market rally enervated the early strength which had developed in fixed income. The equity market rallied in response to the sharp collapse in commodity prices which in turn resulted from the rally of greenback in the foreign exchange. Financial stocks had been the canary in the coal mine when the world was about to end but those stocks posted solid gains today. The bond market also reacted to news that a House Committee had approved a Democrat sponsored mortgage relief bill. In concert, these factors accelerated the flight from risk averse assets which has been in place since the Bear Stearns takeover.

The yield on the benchmark 2 year note has increased by 11 basis points to 2.37 percent. The rumor mill is operating very actively and there are stories that a hedge fund was a very large seller of the issue versus the longer maturities. The price action certainly supports that theory. The yield on the 5year note has jumped 4 basis points to 3.07 percent while the yield on the 10 year note is unchanged at 3.75 percent. The 30 year bond has moved higher by one basis point to 4.49 percent.

The 2 year/10 year spread has narrowed to 140 basis points. The spread has not been that narrow since late January when the Fed’s panicky Soc Gen trading debacle ease accelerated the steepening process.

There was a heavy calendar of issuance in corporate bond land today. Average daily issuance in 2008 has averaged better than $4 billion per day. Credit Suisse (CS) alone offered and successfully marketed $billion 5 year bonds today and total investment grade issuance is someplace north of $7 billion. The Credit Suisse deal priced +200 and is currently 190 bid. Dow Chemical (DOW) offered bonds in the belly of the curve and that issue is 20 basis points tighter. In general,the new paper received an enthusiastic reception from investors. Separately, the IG 10 is now in the high 80s and is better by 5 basis points today.

Mortgages are closing the day about 3 ticks tighter to Treasuries. It appears that someone did the up in coupon trade and that mortgage desks are off sides as the high coupons outperformed the lower ones even as the curve flattened.

Agency debt is ½ basis point to 2 basis points wider and underperformed swaps today.