Bond Expert: Monday Wrap

by: John Jansen

Prices of Treasury coupon securities registered solid gains today as a host of factors contributed to the market's firm tone. The principal factor in the firmness in the bond market was the reemergence of the risk aversion trade. Spreads in most other investment grade assets classes are widening as the shedding of risk motivates portfolio managers and traders.There is also renewed concern about growth as both the domestic economy and our foreign partners confront financial distress and consumer retrenchment.

The slide in energy prices and other commodity prices has forward looking investors thinking that if those prices can stay in a range around current levels, then inflation reports in the months ahead will moderate and provide central banks with some cover to possible reduce rates.

It is early in the month, but the Treasury refunding with a new 10 year benchmark and a new 30 year bond will lead to a healthy extension of the Index and will lead to some duration buying by those who need to stay on the index.

Geopolitical tensions have also caused concerns and have led some to seek solace and sanctuary in the 2 year note. The prospect of increasing tension between the US and a Russian Empire seeking a place on the world stage is one bit of uncertainty that had not been anticipated. In the short run at least that should cause some to favor the shorter maturities.

The yield on the 2 year note has declined 4 basis points to 2.34 percent. The yield on the 5 year note has slipped 3 basis points to 3.07 percent. The yield on the benchmark 10 year declined just 2 basis points and the yield on the Long Bond has dropped 3 basis points to 4.44

The yield differential between the 2year note and the 5 year note is wider by 2 basis points at 147 basis points.

The 2year /5 year /30 year butterfly is little changed at 64 basis points.

In the corporate bond market the IG 10 is finishing the day around 139 which is 4 basis points wider than levels which prevailed late Friday.

The 5 year American Express deal which priced at T+425 on Friday is tighter by 10 basis points at around T+ 415.

Mortgages opened tighter to Treasury debt but as all other spreads have widened they began to retreat, too. So they are a tick wider to swaps and 6 ticks to 8 ticks wider to Treasuries.

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