Bond Trader: Friday Wrap

Includes: BAC, CFC
by: John Jansen

Prices of Treasury coupon securities dropped sharply following the less than expected decline in payroll employment and unanticipated decline in the unemployment rate to 5.0 percent from 5.1 percent.

The yield on the benchmark 2 year note has increased by 11 basis points to 2.45 percent.

The yield on the 5 year note is higher by 9 basis points and currently trades at 3.16 percent.

The yield on the benchmark 10 year note has surged by 7 basis points to 3.84 percent and the yield on the 30 year bond has increased by 6 basis points to 4.56 percent.

The 2 year/10 year spread is closing the day at 139 basis points. It traded as tight as 132 basis points in the residue of the data this morning but has passed the remainder of the day leaking wider. (I have no capital left so I will refrain from commenting on that trade!!

The labor report headlines were less weak than anticipated but the entrails of the report still disclose an economy in distress. Construction jobs declined by 61K and manufacturing jobs fell by 46K. Retail jobs slippped by 27K. The business service sector boosted employment as it rose 39K following a decline of 34K in the prior month. The data here is not all that heartening as 13K of the 73K swing is in the temporary worker category. In addition the data show that financial services jobs rose 3K, and that flies in the face of the facts here on the ground.

Hourly earnings increased by just 0.1 percent, magnifying the squeeze on consumers as food and energy costs surge.

The index of hours worked fell 0.4 percent from the prior month and that does not bode well for production.

Finally, the diffusion index, which is a measure of the number of broad industry categories hiring versus those firing, fell to 45.4 from 48 percent in the prior month. The break-even level for that metric is 50.

Activity in the Treasury market was light after the initial markdown period this morning. Dealers occupied themselves setting up for the refunding from the propitious levels which prevailed early in the day. The heavy supply of corporate bonds weighed on sentiment in the loner maturities. Others reflected on the coupon sales of the Federal Reserve in the 10 year sector today and surmise that this activity is meant to sterilize the effects of the increase in the new enlarged TAP facility. So many thought that if they were not shy about selling ahead of the Treasury today they will not feel constrained next week, either.

Mortgages finished the day about 2 ticks tighter to swaps. The improvement stemmed from the drop in volatility which is at five month lows.

This morning in my first post I linked to a Bloomberg story which noted that there was some dyspepsia in the marketplace regarding Bank of America (NYSE:BAC) and Countrywide Financial (CFC). Some worry that Bank of America might not guarantee Countywide debt and leave bondholders in the lurch. Against that background, Countrywide CDS widened about 75 basis point today . One salesman with whom I speak regularly noted that his derivative trader emulated Roberto Duran and shouted “no mas” regarding bids on Countrywide debt.

Have a good weekend.