BondSquawk

By Maulik Mody – Bondsquawk.com

September 30, 2010

Treasuries fell slightly for a second day today as better than expected revision to the economic growth and decline in jobless claims eased concerns about the economy. Despite the slightly upward revision, the economic growth remains sluggish and unemployment numbers still hover at unacceptable levels. The data sparked the debate further of whether the Fed will step up Treasury purchases to sustain the recovery. Stocks slid slightly today but ended the month with positive gains even as the recovery seemed to falter. Dow Jones gained 8% this month, which is traditionally considered the worst month of the year.

Economic Data

The U.S. economy grew at an annual pace of 1.7% during the second quarter of the month, barely surpassing economists’ expectations of 1.6%. The revised growth of GDP in the second quarter still remains low, furthering concerns about a slowdown. The economy grew at a rate of 3.7% in the first quarter of the year, but as a double digit unemployment rate takes a toll on consumer spending, the economy is expected to grow slowly for the rest of the year.

The revision was a result of mixed revisions of its constituents. While consumer spending was estimated to grow at 2.2% versus 2.0%, government spending was revised lower to 3.9% from 4.3%. Commercial real estate was revised lower to -0.5% from 0.4%, and overall final demand was revised down 10 bps to 0.9%.  The core PCE price index was revised down to 1.0% from an earlier reported 1.1%. The index for the first quarter was 1.2%. The GDP Price index remained unchanged at 1.9%. Corporate profits for Q2 slowed substantially to 3.0% from 10.5% leaving annual growth still elevated at 37.0% owing to base effects. On balance the data do not change the view of the US economy as having slowed notably as the inventory cycle fades.

On a positive note, initial jobless claims for the week ended Sep 25 fell to 453K from an upwardly revised 469K the prior week. The fall in claims was 7000 more than expected, pulling the 4-week average down to 458K from 464K. The Labor Department reported earlier this month that the private sector added 67K jobs in August. The growth remains positive but moderate and although the private sector is expected to add jobs, it will be insufficient to absorb new entrants to the labor force. Economists at BNP Paribas expect the unemployment rate to move up to 9.7% from 9.6%. Continuing claims fell to 4457K for the week ended Sep 18 from 4540K the week before.

For more on today’s economic data, click here.

Interest Rates

Treasuries slid lower but most remained unchanged as yields moved only a few basis points across the curve. As economic growth revision beat (already underestimated) forecasts, the 10-Yr yield inched up a basis point to 2.51%. The Long Bond was flat at 3.685%. The belly of the curve gained as its yield fell by a basis point to 1.27%. The 2-Yr gained too, pushing its yield a basis point lower to 0.42%.

Inflation expectations as indicated by the yield differential between the 10-Yr treasury and the 10-yr inflation indexed bond (TIPS) was flat at 1.81%.

Across the Atlantic yields were higher for developed nations. Germany’s 5-Yr Bunds gained 3 bp to trade last at 1.48%. 5-Yr French notes also gained 4 bp to 1.72%. 5-Yr U.K. Gilts slid in price pushing yields 3 bp higher to 1.60%.

Among the peripherals, sovereign bonds rallied surprisingly, despite the fall in safer bonds of developed nations. Portugal’s benchmark 5-yr note gained pushing its yield 23 bp lower to 5.10%. Italy’s benchmark bond yield fell 3 bp to 2.81%. Greece’s 5-Yr bond rallied in price as its yield slipped 32 bp to 10.24%. Spain’s bond gained pushing its yield 10 bp lower to 3.08%. 1 bp (basis point) is 0.01%. Bond prices move inversely to its yield.

Across the Capital Markets

Stocks fell slightly but ended the month and the third quarter in the greens. The S&P fell 0.3% to 1141.29, but gained 8.75% this September. NASDAQ slipped 0.4% to 2368.62, but the ended the month 12% higher. The VIX Volatility Index gained 2% to 23.70.

The DXY Index, which measures the performance of the U.S. dollar against six major currencies across the globe, gained 0.7% to 78.754. Euro gained slightly to 1.3634.

Gold was mostly unchanged at 1308.63. Crude oil spot price increased 1.92 to 79.78.

By Maulik Mody – Bondsquawk.com

September 30, 2010

The U.S. economy grew at an annual pace of 1.7% during the second quarter of the month, barely surpassing economists’ expectations of 1.6%. The revised growth of GDP in the second quarter still remains low, furthering concerns about a slowdown. The economy grew at a rate of 3.7% in the first quarter of the year, but as a double digit unemployment rate takes a toll on consumer spending, the economy is expected to grow slowly for the rest of the year.

The revision was a result of mixed revisions of its constituents. While consumer spending was estimated to grow at 2.2% versus 2.0%, government spending was revised lower to 3.9% from 4.3%. Commercial real estate was revised lower to -0.5% from 0.4%, and overall final demand was revised down 10 bps to 0.9%.  The core PCE price index was revised down to 1.0% from an earlier reported 1.1%. The index for the first quarter was 1.2%. The GDP Price index remained unchanged at 1.9%. Corporate profits for Q2 slowed substantially to 3.0% from 10.5% leaving annual growth still elevated at 37.0% owing to base effects. On balance the data do not change the view of the US economy as having slowed notably as the inventory cycle fades.

On a positive note, initial jobless claims for the week ended Sep 25 fell to 453K from an upwardly revised 469K the prior week. The fall in claims was 7000 more than expected, pulling the 4-week average down to 458K from 464K. The Labor Department reported earlier this month that the private sector added 67K jobs in August. The growth remains positive but moderate and although the private sector is expected to add jobs, it will be insufficient to absorb new entrants to the labor force. Economists at BNP Paribas expect the unemployment rate to move up to 9.7% from 9.6%. Continuing claims fell to 4457K for the week ended Sep 18 from 4540K the week before.

Among other releases, the Chicago Purchasing Manager Index for September increased to 60.4 from 56.7 the month before. A reading above 50 indicates that the number of firms reporting improved business outnumber the ones reporting deteriorating business. The Milwaukee Index fell to 50 for September from 59 in August as six of its nine components fell. The production index fell the most, shedding 10 points to 64.

Stocks jumped higher in early morning trade but started shedding their gains towards 11am. The S&P was last seen at 1144, slightly below yesterday’s close. NASDAQ was trading 0.3% lower at 2368. Treasuries were lower as yields pushed higher. The 10-Yr was trading 3 bp higher at 2.53%. The 30-Yr bond was also 2 bp higher at 3.70%.

By Maulik Mody – Bondsquawk.com

September 29, 2010

The government auctions of the 2-Yr, 5-Yr and 7-Yr met with strong demand as investor concerns about the recovery grew after low consumer confidence. Today’s 7-Yr year auction ended this week’s session on a positive note for the bond markets and the government as we saw an increased quantity being offered to direct and indirect bidders instead of primary dealers. The details of the auctions follow.

The 2-Yr auction saw a high cover and low coupon, and was sold at a record low stopout yield of 0.441%. It came through the 1pm bid by 0.5bp, as the 1pm yield on the 2-Yr was 0.446%. The bid cover ratio, or the quantity demanded against the quantity actually issued, was 3.78, the highest since august 2007. A strong non-dealer demand of 49.8% was seen owing to a big step up from indirect bids, which jumped to 39% against 29.2% last month.

The 5-Yr auction also met with strong demand as it came through the 1pm bid by 1.2 bp at a record low stopout yield of 1.260%. The bid cover ratio was 2.96, which is the second highest for this issue. This sale was also characterized by a strong non dealer demand of 58.8%, as bids from indirects came in at 50.1%.

The 7-Yr auction ended a solid season of bond sale as it tailed the 1pm bid by 0.2 bp and was sold at a new record low stopout yield of 1.890%. The bid cover for this auction was 3.04, which is the highest since the 7-yr was reintroduced to the markets.  Non-dealer demand was solid at 63.6%, with the indirect bids falling to 50.2% from 56.7% last month. Direct bids increased from 8.6% to 13.4%.

Thus ended a strong season of auctions with each note being sold at a record low yield.  Treasuries were trading lower as seen in the afternoon. The yield on the 10-Yr was 4 bp higher at 2.51%. Stocks slid lower with the S&P at 1143 and Dow Jones 0.3% weaker at 10842.

Among other issues, the Dubai government successfully sold $1.25 billion of a two-tranche bond, which was well oversubscribed, indicating a strong demand for the emirate’s debt. This deal comes soon after news that Dubai World has convinced most of its creditors to restructure $24.9 billion of debt, after the emirate’s port, financial and real-estate conglomerate defaulted on its bond last November.

Dubai’s Department of Finance reported that the $500 million 5-year tranche has a yield of 6.7%, while the $750 million 10-year tranche has a yield of 7.75%. The government said that the proceeds from the bond sale are meant for general budgetary purposes. The bond is part of its Euro-Medium Term Note Programme that was established in April 2008. The government also said that big orders were placed by high-quality fixed income investors.

By Maulik Mody – Bondsquawk.com

September 28, 2010

As reduced consumer confidence in September and cooling home prices increased concerns about the recovery, investors bought Treasuries and pushed yields lower. Stocks decided to overlook the economic release and gained on Walgreen’s earnings that beat estimates and after a Supreme Court hearing favored pharmaceutical companies. Stocks behave surprisingly as they head for the best September since 1939, even when the recovery is showing no signs of strengthening.

Economic Data

Increased concerns about the economy as unemployment hovers near two digits caused consumers to lose confidence in September. This further indicates that the economy will take more time to recover, since lower confidence will mean reduced consumer spending, which constitutes more than 70% of the economy. The Conference Board reported that the confidence index fell to 48.5 this month to the weakest level since February. Economists had expected it to fall to 52.1.

S&P/Case-Shiller reported today that home prices in 20 cities rose slower in July, rising by 3.2% on a year over year basis. Prices fell as demand slumped after the end of the government tax credit to homebuyers. High unemployment, lower household wealth and mounting foreclosures will keep the housing markets slow for this year and some quarter of next year.

The Richmond Fed Manufacturing Index for September came in at -2, after a previous reading of 11. It fell far more than analysts’ expectations of 6. The number indicates that manufacturing activity contracted in the Atlantic region.  Breaking down the number, shipment and employment fell into negative territory. New orders flattened and order backlogs turned negative. Price of raw materials and finished goods grew however, and manufactures expect better prospects in the coming months.

Lastly, the ABC confidence index grew slightly, as it inched up by a point to -45. This however remains largely negative as does the response of most people surveyed. While views on the state of the economy and personal finances remained flat, the index for buying climate improved to -46 for the week ended Sep 26, from -50 for the previous week. This edged up the confidence index by a single tick.

Interest Rates

Yields fell in the further end of the curve as long dated Treasuries gained on increased concerns about the economy. The 10-Yr bond last traded 5 bp lower at 2.47%. The yield on the Long Bond weakened 6 bp to 3.66%. Bonds in the near end of the curve fell as seen by the gain in the yield of the 2-Yr to 0.43%. The belly of the curve flattened as the 5-Yr traded 6 bp lower at 1.26%.

Inflation expectations, as indicated by the yield differential between the 10-yr Treasury note and 10-Yr inflation-indexed bonds (TIPS), widened 5 basis points to 1.83%.

Yields were mixed among European countries. The 5-Yr French note fell pushing its yield 2 bp higher to 1.65%. Germany’s bonds were mostly flat at 1.41%. 5-Yr U.K. Gilts gained as its yield slid 3 bp to 1.60%.

Among the peripherals, yield on Portugal’s 5-Yr bond rallied 26 bp to 5.38%. Ireland’s 5-Yr fell as its yield gained 29 bp to 5.97%. Spain’s 5-Yr traded 7 bp higher at 3.17%. Greece’s 5-Yr bond gained, pushing its yield 20 bp to 10.71%.

Across The Capital Markets

Stocks rallied as good earnings reports offset the drop caused by a fall in consumer confidence. The S&P gained 0.5% to 1147.70. NASDAQ climbed 0.4% to 2379.59. The CBOE Volatility VIX index …

The DXY index, which measures the dollar against six major currencies across the world, fell marginally to 79.338. The Euro gained against the dollar to 1.3585.

Gold price crossed the 1300 mark to scale a new high of 1309.05.

September 28, 2010

Jon Hilsenrath, in an article on WSJ, discusses the approaches the Fed can adopt to purchase bonds in case it sees the economy slowing further and decides that it needs to bolster recovery. Like the first round of quantitative easing, it can adopt a shock and awe approach where it will announce buying a huge chunk of bonds ($1 trillion worth of bonds as estimated by Goldman Sachs). Besides the fact that if it purchases Treasuries worth a trillion dollars, it will end up financing all the net debt that it decided to issue this year, there is another risk. In case the economy reverses and triggers a big uptick in inflation, it can be very difficult to contain inflation.

The second approach that it can adopt is the baby step approach, where it makes purchases in steps of $100 billion or so and takes further steps only after assessing the economy and whether more purchases are needed. Opponents of this proposal say that it will have less impact as investors wouldn’t be certain whether the purchases would continue. Read the full article below.

Federal Reserve officials are considering new tactics for the purchase of long-term U.S. Treasury securities to bolster a disappointingly slow recovery.

Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.

The Fed hasn’t yet committed to stepping up its bond purchases, and members haven’t settled on an approach. After its meeting last week, the Fed’s policy committee said it was “prepared” to take new steps if needed.

A decision on whether to buy more bonds depends on incoming data about economic growth and inflation; if the economy picks up steam, officials might decide no action is needed.

The Fed’s internal debate about a bond-buying strategy is emblematic of the challenging position in which it finds itself. In normal times, it simply raises or lowers short-term interest rates to guide the economy.

But having pushed short-term rates to near zero, it now has to devise new, untested approaches at almost every turn. A misstep could lead to unintended consequences, one factor that makes officials wary and investors jittery about its every move.

In theory, buying long-term bonds pushes other interest rates down because it reduces the supply of debt available to investors, pushing up the price of this debt and the yield down.

In March 2009, the Fed said it would buy $1.7 trillion worth of Treasury and mortgage-backed securities over a six to nine month period—known inside the Fed as the “shock and awe” approach.

Most Fed officials believe that helped to drive down long-term interest rates and spurred the economy.

Under the alternative approach gaining favor inside the Fed, it would announce purchases of a much smaller amount for some brief period and leave open the question of whether it would do more, a decision that would turn on how the economy is doing. This would give officials more flexibility in the face of an uncertain recovery.

Most economists at the Fed and outside, though not all, believe that the Fed’s decision to embark on what’s known as “quantitative easing”—buying bonds—after cutting its target for short-term interest rates to near zero helped prevent an even deeper recession.

A move to resume the purchases would be a big step for the Fed, which just a few months ago was talking about how to reduce its portfolio.

In deciding how to resume its large-scale purchases, if it opts to do so, the Fed is considering both the potential benefits of pushing down already-low long-term interest rates and the potential risks, particularly to its credibility in financial markets about its ability and willingness to reverse course if the economy rebounds or inflation accelerates.

Fed officials have done little to dissuade investors that they might do more.

Fed Chairman Ben Bernanke last week reiterated his dissatisfaction with the recovery, saying the economy has failed to grow “with sufficient vigor to significantly reduce the high level of unemployment.”

Markets anticipate the Fed will pull the trigger, barring some surprise turn in the economy. Economists at Goldman Sachs Group Inc. estimate the Fed will end up purchasing at least another $1 trillion in securities, and estimate that would push long-term interest rates down by a further 0.25 percentage point.

A leading public proponent of a baby-step approach is James Bullard, a 20-year Fed veteran who has been president of the St. Louis Federal Reserve Bank since 2008. He says he has made progress convincing his other colleagues to seriously consider that path.

“The shock and awe approach is rarely the optimal way to conduct monetary policy,” he says. “I really do not think it is the right way to go except in really exceptional circumstances.”

In the heat of the crisis it made sense to jar frozen markets back to life with a big attention-grabbing program, he says. Announcing another big program with a finite end date now, he says, would lock the Fed into a policy that might not prove appropriate several months from now.

Moreover, a large commitment could destabilize markets by unhinging the dollar or creating fears of a big inflation uptick, he says.

Under a small-scale approach, Mr. Bullard says, the Fed might announce some still-undecided target for bond buying—say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed, he says, based on whether “we’re making progress toward our mandate of maximum sustainable employment and inflation at our implicit inflation target.”

There are many open questions. One is size. Mr. Bullard says doing more than $1 trillion of purchases per year would give him “pause” because that’s how much net debt the Treasury will issue this year, meaning the Fed would be financing it all. There is also a question of whether the Fed might tie further action to movements in the unemployment rate, inflation or other metrics.

Mr. Bullard currently is among 12 regional Fed bank presidents with a vote on monetary policy, along with the four current Fed governors in Washington. He has been arguing for this kind of approach to Fed policy for several months, but only began to get traction with other officials as the economy slowed down this summer.

The Fed is not of one mind on the issue, though. Some officials are reluctant to resume bond buying to, as they put it, “fine tune” the economy. Others are more inclined to be bold to resuscitate the recovery.

A small-scale approach could be a path to compromise among officials.

“Given the disagreement about the need for additional easing within the FOMC, retaining some flexibility might be critical to the adoption” of more quantitative easing, Goldman Sachs analysts said recently.

The Goldman economists estimate that an open-ended, small-scale approach would have less impact on bond markets than a large one-time approach, because investors wouldn’t be certain about whether such a program would continue.

“The more you commit to large amount of purchases up front, the bigger effect you’re going to get,” says Jan Hatzius, Goldman’s chief economist.

The Fed concluded its $1.7 trillion purchases of mortgage and Treasury bonds in March. Researchers at the Federal Reserve Bank of New York estimate that the program reduced long-term interest rates by between 0.3 percentage point and 1 full percentage point.

The Fed took a step toward new purchases in August. It said it would begin replacing maturing mortgage bonds by purchasing Treasury debt to keep the overall level of its securities holdings constant.

Join the discussion on the Bondsquawk community.

By Maulik Mody – Bondsquawk.com

September 27, 2010

As reports by the Chicago Fed and Dallas Fed indicating that the economy slowed down in recent months increased concerns about the recovery, investors sought the safety of U.S. government bonds, pushing yields lower across the curve. Stocks declined today after rallying for four straight weeks, even as the recovery showed no signs of strengthening or stabilizing. The dollar ended higher and the gold weakened slightly.

Economic Data

The Federal Reserve Bank of Chicago indicated that economic activity in the U.S. fell in August. The Chicago Fed National Activity Index, which tracks 85 leading economic indicators, came in at -0.53 in August, after a downwardly revised reading of -0.11 in July. Some of the important indicators that the index draws upon include the Labor Department’s report on unemployment and ISM Manufacturing Index, which comes in later this week.

A negative reading of the index indicates slowing growth in the economy and easing inflation pressure. This is the fourth consecutive negative reading which brings the three month moving average to -0.42, from -0.27 in July. When the three month average falls below -0.70, it is assumed to be highly likely that recession has begun.

The Dallas Fed also indicated a slowdown in the recovery as the Fed manufacturing activity index for September came in at -17.7, disappointing expectations of -6.0. This reading continues to be in the depressing zone, following a reading of -13.3 for August, and being the fourth consecutive number sub zero.

For more on today’s economic data, click here.

Interest Rates

Government bonds gained on increased concerns about the economy as yields slid lower across the curve. The yield on the benchmark 10-Yr note fell 8 bp to 2.52%. The yield on the Long Bond followed suit to end at 2.72%. The 2-Yr yield fell 3 bp to 0.41%, ending within spitting distance of its all time low. The belly of the curve fell as the yield on the 5-Yr slipped 6 bp to 1.29%.

Inflation expectations, as indicated by the yield differential between the 10-yr Treasury note and 10-Yr inflation-indexed bonds (TIPS), tightened 6 basis points to 1.78%.

Yields ended mostly higher across the Atlantic. The 5-Yr French note gained in price pushing its yield lower to 1.63%. Germany’s bond reversed its losses from last week as its yield slipped to 1.41%. 5-Yr U.K. Gilts gained as its yield weakened to 1.63%.

Among the peripherals, yield on Portugal’s 5-Yr bond gained 10 bp to 5.12%. Ireland’s 5-Yr fell as its yield gained 19 bp to 5.70%. Spain’s 5-Yr ended higher as yields fell 2 bp to 3.10%. Greece’s 5-Yr bond gained, pushing its yield 15 bp to 10.91%.

Across The Capital Markets

Stocks ended weaker on the first day of the week, paring some of its gains from last week. The S&P fell 0.6% to 1142.16, while NASDAQ fell 0.5% to 2369.77. The VIX Volatility index increased to 22.54.

The DXY index, which measures the dollar against six major currencies around the world, gained slightly to 79.449. Euro weakened to 1.3455. The GBP ended flat at 1.5827

Gold ended its streak and fell to 1294.35.

By Maulik Mody – Bondsquawk.com

September 27, 2010

Treasuries continued their rally on increased concerns about the economic recovery after the Federal Reserve Bank of Chicago indicated that economic activity in the U.S. fell in August. The Chicago Fed National Activity Index, which tracks 85 leading economic indicators, came in at -0.53 in August, after a downwardly revised reading of -0.11 in July. Some of the important indicators that the index draws upon include the Labor Department’s report on unemployment and ISM Manufacturing Index, which comes in later this week.

A negative reading of the index indicates slowing growth in the economy and easing inflation pressure. This is the fourth consecutive negative reading which brings the three month moving average to -0.42, from -0.27 in July. When the three month average falls below -0.70, it is assumed to be highly likely that recession has begun.

The Dallas Fed also indicated a slowdown in the recovery as the Fed manufacturing activity index for September came in at -17.7, disappointing expectations of -6.0. This reading continues to be in the depressing zone, following a reading of -13.3 for August, and being the fourth consecutive number sub zero.

Breaking down the general business activity number indicated that some factors improved during the month. Production increased from -0.1 to 4.0 in the previous month, while capacity utilization index jumped from -3.1 to 3.9, suggesting that factory manufacturing activity is improving. Orders growth rate also increased from -13 to 0, hinting that the pace of orders is stabilizing.

Raw materials prices index remained stable at near 24, while prices received jumped into positive territory from -5.7 last month. Labor markets also showed improvement as the employment index turned to positive 1.8 from a negative 5.1value in August. Capital expenditure suffered the most, falling to -12.1 from 1.0 last month.

As a slowdown indicated by the Fed reports increased concerns about the recovery, investors bid up Treasury prices, pushing yields lower. The yield on the 10-Yr note slipped 7 bp to 2.53 in morning trade, while the yield on the Long Bond shed 8 bp to 3.71%. Stocks reversed their gains as the S&P shed 0..4% to 1144.03. The NASDAQ wakened 0.45% and was last seen at 2370.50.

By Maulik Mody – Bondsquawk.com

September 27, 2010

The performance of different asset classes last week as seen by the major indices showed that despite the Fed’s announcement that the recovery was slow, and even as investors sought the safety of U.S. Treasury bonds, stocks outperformed corporate bonds and other commodities to be the most attractive asset class for the week.

Although most stock indices lost for three days in the week, they rallied on the last day on improved demand for capital goods and corporate earnings to reverse their losses and end in the green. The Russell 2000 index gained the most on a week basis, improving by 3.0%. NASDAQ and Dow Jones closely followed with 2.8% and 2.4% respectively. The S&P gained 2.1% in the week and closed at 1148.67. Global stocks improved 2.2% during the week. European stocks also ended higher, edging up 0.4%. REIT stocks ended in the red zone, shedding 0.1%. However, on a year basis, they outperformed all other assets with a 34% annual return.

The leader among commodities was crude oil, which rallied 2.1% during the week. Even as gold scaled new heights during the week, it returned only 1.6% on a weekly basis. However, the glowing metal proved to be the best investment among commodities on a year basis, gaining 30.9% during the year ended last week. Oil on the other hand gained 15.9% during the year ended last week. Commodity futures ended the weak 1.3% higher. Among corporate bonds, investment grade bonds gained 0.7% while junk bonds improved 0.3% during the week. Emerging market bonds improved half a percent, outperforming high yield bonds.

Recent trend has shown that even as the recovery remains sluggish, investors are gaining their appetite for stocks and other risky assets. The S&P has posted gains for the past four weeks, and so have Dow Jones and NASDAQ. Treasury yields bounced off their lowest levels reached last month, and they declined again last week on increased concerns about the economy. Among the important economic releases to look forward to this week will be the ISM Manufacturing index and the consumer confidence index. The government auction of $90 billion worth of Treasuries in 2-Yr, 5-Yr and 7-Yr notes is expected to face a strong demand, and this can push yields higher in the week.

September 24, 2010

The week ended with corporate bonds trading at higher prices, but spreads widened as they failed to keep up with the rise in Treasuries. The short iTB index, which tracks the performance of bonds maturing less than 5 years from now, rallied 0.1% during the week to close at 1085.82. The average yield tightened 6 bp during the week to 2.45%. Spreads remained flat at 1.69% as corporate bonds in this maturity spectrum performed at par with Treasuries with equal maturity.

The best performer of the week was BP’s 5.25% issue due in 2013. The bond gained $1.07 and ended the week at 107.60. The yield on the bond fell 36 bp to 2.69%, and its spread tightened by 30 bp during this period. The extra yield that investors now demand to hold BP’s debt over government debt is 1.95%.

The long index rallied more on a price basis as compared to it shorter-maturity counterpart. The index gained 0.8% to 1147.43. The average yield fell 11 basis points to 3.97%, while spreads widened 2 bp to 1.66% since long dated Treasuries outperformed corporate bonds.

The best performer in this index too is a bond of the oil industry. Anadarko Petro’s 6.45% issue gained $2.71 to trade last at 97.42. The yield on the bond decreased 23bp to 6.66%, while its spread tightened 12 bp to 3.19%. BP and APC were the two companies that had leased the Deepwater Horizon oil rig and after its explosion, the bonds of these companies fell to their lowest levels. After the spill was contained, these bonds started rallying as yields started to fall.

By Maulik Mody – Bondsquawk.com

September 24, 2010

Stocks reversed their decline and Treasuries ended their rally as the Commerce Department reported today that demand for capital goods increased in August.  Stocks reversed their losses of a week in a day’s rally after improved economic numbers and better than expected earnings reported by Nike Inc. Gold continued its rally to new heights everyday and dollar fell ending the week slightly lower.

Economic Data

After a week of poor economic numbers and the FOMC meeting outcome that increased concerns about the economy, demand for U.S. capital goods increased in August signaling that business investment is holding up better than some economists projected. The Commerce Department reported that demand for goods excluding aircrafts and transportation equipment jumped 4.1%, beating expectations of 3.0%. The previous month number was revised upwards from -8.0% to -5.3%. Core capital goods shipments, which closely track business investment in GDP rose 1.6% after a basically flat reading. On 3-month annualized basis core capital goods shipments rose 11.5% through August, down from the 17.4% in Q2 but still robust and consistent with a solid contribution to GDP from continued investment in equipment and software in Q3.

Total orders for durable goods fell more than expected by 1.3%, as a result of a 10% decline in transportation gear orders. Boeing Co reported that it received only 10 orders last month as opposed to 130 orders in July. However, excluding transportation, orders rose by 2.0%, beating expectations of 1% and improved over a downwardly revised fall of 2.8% in June.

New home sales disappointed as fewer than forecast new homes were sold in the U.S. during the last month. Sales data came in flat at an annual rate of 288,000, missing expectations of 295,000. This matches the number for July as being the second lowest level in almost 40 years. High unemployment rate and increasing foreclosures will keep the housing market from gaining momentum. Mortgage applications fell as seen earlier this week and so did the confidence index, showing that the growth is sluggish and with eroded household wealth & poor sentiments, the recovery in this market will be rather slow.

For more on today’s economic data, click here.

Interest Rates

Government bonds fell on eased concerns about the economy after economic numbers indicated sustained business investment and on good earnings reported by Nike Inc.  As a result, yields across the curve ended higher.

The 10-Yr note fell as its yield gained 5 bp to 2.60%. However, the benchmark retained gains this week as it ended 13 bp lower as compared to last week’s close. The Long Bond fell the most as its yield rallied 6 bp to 380%. The 2-Yr bond fell pushing its yield 2 bp higher to 0.44%. The belly of the curve gained moderately and the 5-Yr traded 3 bp higher at 1.345%.

Inflation expectations, as indicated by the yield differential between the 10-yr Treasury note and 10-Yr inflation-indexed bonds (TIPS), widened 2 basis points to 1.84%.

Government bonds across the Atlantic ended their spree as yields rose for most countries. The rate on the French 5-Yr bond was 5 bp higher at 1.71%. 5-yr U.K. Gilts gained to push its yield jumped 8 bp to 1.70%. Germany’s 5-Yr bond traded 4 bp higher at 1.48%.

Among the peripherals, yield on Portugal’s 5-Yr bond gained 13 bp to 5.03%. Ireland’s 5-Yr continued fell as its yield gained 6 bp to 5.51%. Spain’s 5-Yr ended slower as yields gained 8 bp to 3.12%. Greece’s 5-Yr bond was the only one to gain, pushing its yield 8 bp to 11.04%.

Across The Capital Markets

After falling for most of the week, stocks made up for their losses and ended the week higher as concerns about the recovery were eased by today’s improved data. The S&P rallied 2.1% to 1148.67, reversing its losses since three days. NASDAQ gained 2.3% to 2381.22. The CBOE Volatility VIX index slipped to 21.31.

The DXY index , which measures the dollar against six major currencies around the world, slipped to 79.395. Euro gained against the dollar to 1.3492. The GBP grew stronger to 1.5826.

Gold ended the week at a record high of 1295.95. Crude spot price rose to 76.49.