Bond Market Recap
By Rom Badilla, CFA
July 18, 2012
As Ben Bernanke warned of risks to the recovery in front of Congress and despite positive economic data, bonds in both the Treasury and Corporate market rallied as yields declined. The Federal Reserve Chairman stated that current fiscal policies are unsustainable and the fiscal cliff may jeopardize the tepid recovery. As economic growth is showing signs of slowing, Bernanke referred to expiring tax cuts on income and capital gains which would cripple consumers’ ability to spend. In addition, Bernanke reiterated that inflation pressures seem to be well in check given the drop in oil prices.
On the data front, economic numbers were positive which suggest that there may be some strength in future growth. Housing Starts, which represent new construction residential buildings, spiked and beat expectations. Housing Starts for June came in at 760,000 annualized units which is an improvement over the revised prior month figure of 711,000. Economists were expecting an increase of 745,000 in June. The latest round of data gives owners hope as the housing market has faced downward pressure in prices since the bubble burst several years ago.
Despite the positive economic data, U.S. Treasury yields continued to decline leading to further price gains. The current on-the-run U.S. Treasury 10-Year gained 0.07% on a dollar price basis as the yield dropped 2 basis points from yesterday’s close to 1.48%. The yield on the 5-Year matched the change by ending the day at 0.60% for a 0.06% dollar price increase. While the 2-Year at a yield of 0.22% continues to sink below the Fed Funds target rate, the Long Bond was flat on the day as the yield on the 30-Year ended at 2.60%.
While Treasuries gained on the day, Corporate Bonds continued its recent rally. According to Trade Monster’s Bond Trading Center, Bank of America bonds rallied fueled by their earnings release announcement coupled with signs of further deleveraging. The yield on BAC 5.7% Coupon Maturing January 24, 2022 (CUSIP 06051GEM7) dropped 27 basis points to yield 3.72%.
The yield on Wall-Mart Stores 3.25% Coupon Maturing October 25, 2020 declining of 8 basis points to 1.88% and was one of the bigger movers in the stable Industrial sector.
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