Corporate spreads continue to tighten

Good Morning,

Treasuries prices closed with mixed results on Tuesday as the absence of economic data, with the exception of the ABC consumer confidence, gave little direction to market participants who then focused on the performance of equities, via company earnings, as well as remarks made by the Bank of Canada regarding short term rates. The better than expected earnings reports from financial companies such as Bank of NY (0.59 vs. 0.52), US Bank (0.36 vs. 0.34) and Goldman Sachs (5.59 vs. 4.14) invigorated investors’ belief in the economic recovery pushing them away from safe-haven investing in short term government securities. Additionally, short term prices reacted negatively to comments made from the Bank of Canada (BOC) which kept rates at 0.25% but removed language suggesting rates will remain unchanged for a considerable period. The 2-year note dropped 2/32 to yield 1.01% while the 5-year lost 3/32 yielding 2.53%. The benchmark 10-year traded lower most of the day and recovered in late afternoon trading to close 1/32 higher yielding 3.79%. On the other hand, the long bond rose 11/32 to yield 4.67%.

We are seeing a mixed performance on Treasuries this morning as short and intermediate maturities are basically unchanged from yesterday’s close while long dated Treasuries are trading higher. The 2-year note is unchanged at 1.01% while the 5-year note is up 2/32 yielding 2.53%.The benchmark 10-year has risen 6/32 to yield 3.77% and the long bond is trading 16/32 higher to yield 4.64%. The day offers no top-tier economic releases, only the second-tier MBA Mortgage Applications report released at 6:00 am CDT. The report showed that home mortgage applications rose to 13.60% last week as potential buyers took advantage of the government tax credit scheduled to expire at the end of this month.

It is worth noting that, as investors continue to move back into Taxable products, spreads continue to tighten considerably. As you can see in the graph below, the 10 year UST / A + Corporate spread has narrowed to pre-crisis levels at 88 basis points. Therefore, investors looking for more attractive levels will be rewarded by looking in the BBB bonds or into preferreds which continue to appreciate as the economy recovers. Currently the 10-year BBB corporate index is yielding 5.82% while financial preferreds yield on average 7.35%.