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Prices of Treasury coupon securities surged higher today as a generalized need for duration and concerns about economic growth motivated a wave of fixed income purchases. Other factors such as the sharp drop in the stock market and statements by ECB major domo Trichet contributed to the uneasy tone. The continued strength of the once out of fashion US dollar has also motivated some international investors to sprinkle some money into the US bond market.

Tomorrow is the first Friday of the month and the market will wait on edge for the monthly labor data. The consensus forecast is that employers will have declared about 75K workers redundant. That is pretty close to the monthly average for 2008 and is a safe call.

This recession or soft patch (or whatever other nomenclature you wish to apply) has been distinguished by the tepid nature of job loss. We have not had several months in which the economy sheds 150K to 200K workers. I am not a professional economist but the weakness in the weekly claims numbers is instructive and worrisome. The jobs component of the non manufacturing ISM weakened today and the jobs component of the confidence surveys have suggested a less than festive labor market. Sometimes the markets speak to us and I would not be surprised if one of a myriad of messages contained in a 2.20 percent 2 year note is that the economy and the job market is deteriorating rapidly. So maybe this is the month that there is an outsized reduction in the labor force.

ECB leader Trichet stirred the pot with some of his comments following the ECB decision to leave rates unchanged this morning. He reiterated that it his mission to rein inflation and he did not seemed concerned that the economy in Europe is in recession or on the brink of a recession.

Mr Trichet also caused a bit of a ruckus with his announcement that the ECB would take a significantly larger haircut on collateral which investment banks and banks place with the ECB under some of the new liquidity facilities. That raised the specter of more asset sales and more deleveraging.

In that regard Bill Gross of PIMCO called for asset purchases by the Federal Government to stem the vicious cycle of asset sales and lower prices which then bring forth still more sales at even lower prices. PIMCO , purportedly, was a big buyer of distressed assets earlier in the year. Those assets are even more distressed now. The salient point of the Gross commentary (no pun intended) is that PIMCO’s appetite for distressed debt is sated until the process of balance sheet repair and equity building has been completed.

Yields on benchmark Treasury debt plummeted today. The yield on the 2 year note slid 7 basis points to 2.18 percent. The yield on the benchmark 5 year note tumbled 9 basis points to 2.86 percent. The yield on the 10 year dropped 7 basis points to 3.63 percent and the yield on the Long Bond slipped 5 basis points to 4.27 percent.

The 2 year/10 year spread finished unchanged at 145 basis points.

The 2 year/5 year/30 year butterfly truly reflected the demand for paper in the belly of the curve as the 5 year note flattened 2 basis points versus the 2 year note and steepened 4 basis points against the 30 year bond. The spread closed at 73 basis points today after closing yesterday at 67 basis points.

The 10 year TIPS spread which busted through the 200 basis point level yesterday is down to 194 basis points today.

Swap spreads are tighter by 1 ½ basis points in 2 years and 5 years and by 2 basis points in the 10 year sector.

Corporate bonds:

Corporate bonds leaked wider over the course of the day and finished with the IG 10 at 146 1/4 basis points.  That market did not enjoy the same demand as some other investment grade sectors as the anticipation of very heavy supply in the new issue market has engendered a cautious psychology amongst buyers.

Separately, Canadian timber company Tembec [TSE:TMB] filed for bankruptcy today. It is a sad funny story as related by Bloomberg. Obviously, the housing depression has wounded them. But the Bloomberg reporter cites several other factors which contributed to their demise which informs the reader that the cards were stacked against this company.

Demand for newsprint has declined as the internet becomes a principal purveyor of information. The other factor cited in the text of the story is a beetle infestation in British Columbia.

So the company was done in by technology and insects.

Source: Bond Expert: Thursday Wrap