Thursday Bond Market Recap

by: Bondsquawk, CFA

By Maulik Mody

Stocks ended the day slightly lower after paring some of its losses from the morning and Treasuries fell too as a reaction to the mixed economic data and increased supply of corporate debt. Better prices paid and slightly improved jobless claims numbers released today eased investor’s concerns that the Fed might resume quantitative easing by buying long-dated Treasuries. As a result, yield ended higher on the far end of the spectrum.

Economic Data

Adding to the stream of data suggesting that the economy is not headed towards a deflationary environment was wholesale costs for August, which rose for a second month. The Producer Price Index for August increased 0.4%, beating expectations of 0.3%. The gain was the most in five months and twice the gain the index posted in July. Excluding food and energy costs, the index gained 0.1%. The data suggests that although inflation remains low, the risk of the economy heading towards disinflation or deflation remain low. As opposed to a year earlier, companies paid 3.1% more for goods last month, and 1.3% more excluding food and energy.

In employment figures, the Labor Department reported that the number of people applying for first time unemployment benefits fell 3K to 450K for the week ended September 11. Initial jobless claims dropped for the first time in four weeks after an upwardly revised 453K claims for the week ended September 4. Claims fell to the lowest level in over two months. According to the Labor Department “seasonal factors expect an administrative rebound next week in the unadjusted total, a fluctuation that clouds the economic picture of whether the labor market is actually improving.” The reading takes the 4-week moving average down to 465k from 478k which is still elevated and highlights that we need several more readings in this neighborhood before we can conclude this is a positive signal of improved labor market conditions.

In other economic release, manufacturing in the Philadelphia region contracted in September. The Philadelphia Fed general economic index rose to -0.7% after -7.7% in July. A negative reading indicates contraction in manufacturing activity in the index. The data disappointed as economists had forecast it to rise to 0.3%. Among its components, the prices paid gained to 9.8 after 11.8 for August. New orders fell to 8.1, and shipments fell to 7.1. While the number of employees increased 1.8%, the average workweek statistic came in at -21.6, from -17.1 for August.

Interest Rates

Yields increased along the curve, led by the further end of the spectrum as bonds fell on eased concerns about the economy. The 10-Yr fell to send its yield 4 bp higher to 2.76%. The Long Bond slipped as its yield ended 6 bp higher at 3.93%. The 5-Yr note fell less comparatively, with its yield at 1.47%, 2 bp higher than yesterday’s close. The front end of the curve fell as the yield on the 2-Yr ended a b lower at 0.47%. (Click to enlarge)


Inflation expectation, as seen by the yield differential between the 10-Yr Treasury Note and 10-Yr inflation indexed bonds (TIPS), widened to 1.805%.


Across the Atlantic, bonds were weaker for developed nations. Germany’s 5-Yr Bunds slumped as yields ended 8 bp higher to 1.47%. The yield on 5-Yr U.K. Gilts gained 5 bp to 1.80%.

Yields were mixed across peripheral nations. Portugal’s 5-Yr Bonds fell as yields ended 11 bp higher at 4.57%. Yield on Spain’s 5-yr followed suit to 3.09%. Surprisingly, the Greece 5-yr bond gained as its yield fell 11 bp to 11.62%.

Credit Markets

Corporate bonds rallied today on increased issuance as seen in the iTB Corporate Bond Indices. The short index advanced to 1084.51 pushing yield 2 bp lower to 2.51%. Corporate bonds outperformed Treasuries as spreads tightened 9 bp to 1.68%. The best performer for the day, also the best performer for the last month, was Transocean’s 5.25% issue due 2013. The bond rallied $1.95 in price pushing yields 81 bp down to 3.27. Spreads tightened 70 bp to 2.68%.


The long index gained but not as much as its shorter counterpart, advancing slightly to 1137.46. Average yield fell 7 bp to 4.11, while spread tightened 3 bp to 1.64%. The best performer today was also the best performer for August. Anadarko Petro’s 6.45% issue due in 2036 advanced $2.04 in price to 94.60. Yields fell 18 bp to 6.90%, while spread tightened 22 bp to 3.32%.


Across The Capital Markets

Stocks were mixed today but mostly fell after mixed economic data releases. The S&P lost earlier in the day but pared most of its losses and ended almost where it started at 1124.66, merely 0.04% weaker than yesterday. NASDAQ edged 0.08% higher to 2303.25. The VIX Volatility index ended close to 2% weaker at 21.72.

The dollar DXY index, which measures the greenback against six major currencies around the world, slid down to 81.25. Euro was trading higher at 1.3076. Crude oil fell to 74.57.

Disclosure: None