Bond Market Recap – June 17, 2010


By Rom Badilla, CFA –

June 17, 2010

While the equity markets had their eyes on the punchbowl at the Euro party, bonds posted an impressive rally today as data releases suggest signs of a weakening economy.

The unemployment picture is showing few signs of improvement as the weekly Initial Jobless Claims number increased and came in higher than expected. Figures for the week ending June 12 increased to 472,000 people who filed for first-time unemployment benefits from the revised prior week of 460,000. Economists were expecting a decline as the survey numbers was at 450,000. The four week moving average which has been hovering between 450k to 500k since last November, now stands at 463,500 which is more in-line with further job losses. A moving average of below 400k is more in line with a recovery.

Continuing Claims for the week ending June 5 ticked up to 4,571k from a revised prior period of 4,483k. Economists were expecting a claims reading of 4,500k.

The Philadelphia Fed Business Outlook Survey which measures regional manufacturing activity dropped to a reading of 8, a ten month low from a prior reading of 21.4. Economists were expecting a reading of 20. A reading above zero signals economic growth.

While CPI data (Headline at +2.0 percent YoY and Core at +0.9 percent YoY) came in as expected which overall was fairly low to begin with, declining price pressures appear to be mounting. When looking beyond the headline Philly Fed numbers, the prices paid component dropped significantly from a May reading of 35.5 to 10. Comparatively, the last monthly drop of greater than 20 occurred in November 2008 as the prices paid component declined from 8.6 to -20.4. In the month prior to that, the component dropped 21 points from 29.5 in September 2008. Today’s reading is signaling declining price pressures which should fan the fires of the disinflation/deflation camp.

Prices Paid component of Philadelphia Fed Survey - Historical Chart

As a result, U.S. Treasuries advanced across the maturity spectrum, led by the long-end in a yield curve steepener. The 10-Year outperformed the rest of the stack as the yield declined 8 basis points to a yield of 3.18 percent. The 5-Year and Long Bond followed suit by tightening 6 basis points to 1.99 and 4.12 percent, respectively. The front-end advanced taking another stab at the lows in yields. The yield on the 2-Year declined 2 basis points and now stands at 0.70 percent, 5 basis points off the recent lows established in early May.

10-Year U.S. Treasury Yield - Intraday Chart

LIBOR-OIS spread in both US Dollar and Euro remained the same from yesterday and closed at 32.5 and 31.4 basis points, respectively.

The European Bond markets expressed a sign of relief due to the successful Spanish auction. After all that is said and done, the yield on Spanish 10-Year bonds declined 11 basis points to 4.77 percent. The Spain 5-Year tightened 4 basis points to 3.88 percent.

10-Year Spain Government Yield - Historical Chart

Around the peripherals, yields were mixed. Greece 5-Year declined 8 basis points to a yield of 9.49 percent. Italy’s declined 6 basis points to 2.86 percent while Ireland’s closed at 4.61 percent, an increase of 2 basis points. Portugal jumped 6 basis points to 4.41 percent.

Germany’s 5-Year was unchanged on the day at 1.51 percent while France’s declined 4 basis points to a yield of 1.84 percent.

Credit conditions continued to improve as spreads on the major indices declined. The BofA Merrill Lynch High Yield Master Index tightened 6 basis points to a spread of 691. The U.S. Corporate Index declined a basis point to a spread of 209 basis points. The U.S. Bank Index finished the day at a mark of 277 basis points, a decline of 3 from yesterday.

Stocks see-sawed in both positive and negative territory on the day before closing slightly higher. The S&P 500 advanced 0.1 percent to 1116.04 while the Nasdaq ended the day at 2307.16, a tiny decline of 0.1 percent. The CBOE VIX Index decreased 3.4 percent to 25.05.

The Dollar Index dropped 0.5 percent to 85.688. The Euro gained 0.6 percent to 1.2389 while the British Pound mirrored the advance by closing at 1.4824.



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