Bond Expert: Monday Wrap

Includes: GNW, HOV, MDLZ, PEP
by: John Jansen

Prices of Treasury coupon securities have posted mixed results today with securities with maturities of 5 years and less posting marginal gains and securities with longer maturities finishing dramatically unchanged. The yield on the 2 year note has declined by 3 basis points to 2.41 percent. The yield on the benchmark 5 year note had moved lower by 1 basis point to 3.10 percent. The yield on the 10 year note is unchanged at 3.84 percent and the yield on the Long Bond is unchanged at 4.58 percent. The 2 year/10 year spread has widened by 3 basis points to 143 basis points.

Treasury traders uniformly reported that supply in other markets overwhelmed the Treasury market and the focus of investors was elsewhere. There was very little meaningful customer flow other than that associated with the corporate bond pipeline. One veteran trader did note that the Treasury market faces its own supply issues as Treasury will announce later this week about $50 billion of new coupon supply ($30 billion 2 year notes and $20 billion 5 year notes, according to forecasters) for auction next week. Some also note that May 31 is quarter end for some of the big investment banks (one less than last quarter) and as month end looms liquidity might be impaired as those entities address the various artifices and ruses mandated by the accounting profession.

Corporate bond supply dominated the landscape today and issuance was very heavy. I do not have an exact dollar amount but it is north of $10 billion by most estimates. Salespersons with whom I spoke report that the issuance received an enthusiastic reception from investors. Spreads as measured by the IG 10 are about 5 basis points tighter and secondary market paper was about a basis point or so tighter. The cash market was moribund and comatose as the new issue market drove trading. It was a rather eclectic group of issuers and amongst the offerings was debt for Kraft (KFT), HSBC, Pepsico (NYSE:PEP) and Genworth Financial (NYSE:GNW).

One salesman reported to me an example of irrational exuberance in the corporate bond market. It seems that on Friday that in extremis homebuilder Hovanian (NYSE:HOV) was able to execute a $600million private placement of 5 year notes. The bond carried a Sisyphean 11 ½ percent coupon. I assume that the bond came at 100 on Friday and the middle of the market on the issue at one point today was 104.

Mortgage spreads finished about a tick tighter to swaps. This asset class benefited from a collapse in volatility as well as some chunky foreign buying.

Have a great evening.

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