BOND MARKET RECAP

By Rom Badilla, CFA – Bondsquawk.com

The yield curve steepened as U.S. Treasuries rallied again on a flight-to-quality trade due to the European debt crisis. The front-end of the curve led the way and outperformed the rest of the maturity spectrum. The yield on the 2-Year declined 7 basis points to 0.87 percent while both the yield on the 3 and 5-Year dropped 8 basis points. The 3 and 5-Year closed at a yield of 1.39 and 2.30 percent, respectively. The 10-Year closed at 3.55, a decline of 4 basis points while the yield on the Long Bond lagged but managed to drop 2 basis points to 4.39 percent.

10-Year Treasury Yield – Historical Chart

The spread on the Merrill Lynch High Yield Master Index, which contain over two thousand bonds, widened by 23 to 591 basis points. The U.S. Corporate Bond Index closed the day at 164, an increase of 4 basis points. Spreads can sometimes lead the way to a drop in stock prices.

Bank of America Merrill Lynch High Yield Index YTD Chart

Spreads on 5-Year Credit Default Swaps on sovereigns widened. The spread is the cost associated with owning protection against a default. Hence the higher the chance of default, the more expensive it is to own protection. Greek CDS spiked 149 basis points to 886 while Portugal CDS closed today at 388 basis points, an increase of 36. Spain CDS jumped 24 basis points to a spread of 225. Italy CDS moved from 162 on Tuesday to today’s spread of 183. Ireland CDS is playing catch-up apparently with the rest of the peripheral sovereigns by widening the most. 5-Year CDS on Ireland increased 47 basis points to a spread of 230.

Greece 5-Year Credit Default Swap – Historical Chart

Spreads on Mortgage Backed Securities increased as mortgage yields could not keep pace with the decline in Treasuries. The spread between 30-Year Conventional Par Mortgages and the 10-Year Treasury moved higher by 3 basis points to 79. The spread is now higher by 20 basis points from the low experienced in early March. Wider spreads usually translate to higher borrowing costs for the US homeowner.

Equities tumbled today as the S&P 500 dropped 0.7 percent to 1165.87. The CBOE Volatility Index (VIX) finished at 24.91, an increase of 4.5 percent.

The US Dollar Index closed out higher as the Euro, which comprises about 58 percent, tumbled again. The Dollar Index appreciated 0.96 percent to 84.08 while the Euro declined 1.27 percent to 1.2822.