Bond Expert: Tuesday Wrap

Prices of Treasury coupon securities tumbled sharply today against a backdrop of negative economic news, negative Fedspeak, and a surfeit of corporate bond supply. Additionally, there was a Bloomberg story which noted that the British Bankers Association was considering the method by which Libor is set and traders came to the conclusion that as a consequence of new methodology, short rates would rise. The yield on the benchmark 2 year note has jumped by 16 basis points and sits at 2.46 percent. The yield on the 5 year note also jumped 14 basis points and it landed at 3.15 percent. The yield increases in for the longer maturities were smaller. The yield on the benchmark 10 year note has increased 10 basis points 3.90 percent and the yield on the Long Bond moved higher by 7 basis points to 4.61 percent. The 2 year/ 10 year yield spread has narrowed to 144 basis points.

Economic data today was not bond friendly. The retail sales report was stronger than expected with the ex auto segment posting a solid 0.5 gain. As I noted in an earlier posting gasoline sales fell in the period and had they risen as expected the ex auto component would have been much more robust.

Import prices posted sharp gains in April following strong revisions to March data with prices gaining 1.8 percent and the revised March figure 2.9 percent. According to a Thompson Financial story prices of non petroleum items have increased by 6.2 percent in the last year. That is the largest rate of increase since 1988.

Members of the hierarchy of the central bank were out in full force today launching a series of tape bombs. Chairman Bernanke spoke this morning about central bank management of the ongoing credit crisis. There are some interesting nuggets about the thoughts of Walter Bagehot but nothing to move markets. San Francisco Federal Reserve President Yellen spoke and posited sluggish growth and a declining rate of core inflation.

Cleveland Federal Reserve President Pinalto noted that inflation was rising faster than she would prefer. Kansas City Fed President Hoeing noted that inflation was a major challenge. And Dallas Fed President Fisher averred that slower growth would not stem the rise in oil prices.

Corporate bond supply was heavy today. Phillip Morris offered a three tranche deal comprised of $2.0 billion 5 year notes, $2.0 billion 10 year notes, and 1.5 billion 30 year bonds. Market sources report that each issue will price at T+ 177 basis points. United Technologies also brought $1billion 30 years. That issue should price T+155 basis points. In addition to these very large transactions there was a smattering of smaller deals. In secondary market trading spreads were unchanged to a tad tighter but my observation is that real retail was focused on the new issues. By the time the trading day concludes it is likely that over $8 billion of new corporate bonds will have priced today. Investors have accorded the new supply a cordial reception.

Mortgages have surrendered some of the gains they attained earlier in the day as the backup in Treasury rates weighs on sentiment. One dealer reported selling by hedge funds .

Volatility is a tad higher reflecting the sharp movement in yields today. One vol trader with whom I spoke felt that vol could not move too much as there is no Fed trade to hedge nor is there an imminent convexity trade.