Continuing Claims drop to lowest level since 11/2008

Treasury prices continued to drop drastically on Wednesday as the absence of Tier-1 economic data meant investors again focused on the recent fiscal compromise made on Capitol Hill. The agreement to keep tax cuts in place for another year has been viewed as very favorable for the economy, allowing for strong consumption which could help the U.S. GDP grow at a faster than previously anticipated rate. Furthermore, market participants were also selling government debt as they fear these tax cuts extensions will make it even harder for the government to cut the deficits in the long run. For the record the Treasury department auctioned $21 billion of the re-opened 10-year Treasury note and received bids totaling $61 billion, a bid to cover ratio of 2.92. Although this ratio is above the 2.80 seen in November, the devil seemed to be in the details. Indirect bidders demanded only 44.4% of the new securities; the level of foreign interest was 56.60% in the previous month.

By the end of the day, the 2-year note dropped 6/32 to yield 0.63% while the 5 year note declined 23/32 to yield 1.88%. The benchmark 10-year note reached its highest yield since June 16^th dropping 1 and 6/32 points to yield 3.27%. Similarly, the long bond fell 1 and 14/32 points to yield 4.46%, the most since May of this year. The recent drop in Treasury values has also pushed corporate prices lower. This is due to the fact that the flight to quality investing of fixed income instruments has been taken over by a renewed demand in riskier assets such as equities. This can be attributed to the recent optimism that has developed for sustainable economic recovery. For example, the yield on the benchmark 5-year industrial corporate index is 67 basis points wider than a month ago. Similarly, the 10-year industrial corporate bond index is currently trading 67 bps higher from the same time period.

Treasury prices are reversing yesterday’s course as market participants focus on the release of the Initial Jobless Claims report. Currently the 2-year note has gained 1/32 to yield 0.60% while the 5-year note has improved 4/32 in value yielding 1.85%. Meanwhile the benchmark 10-year Treasury has increased 15/32 yielding 3.21% while the long bond has moved up 24/32 in value to yield 4.41%. The Department released its weekly Initial Jobless Claims report showing that first time claims dropped slightly more than expected during the latest week to 421,000; analysts were expecting claims to drop to 425,000. However, the previous week’s number was upwardly revised to 438,000 from 436,000. The best news came from Continuing Claims as it showed its lowest level since November 2008 with a sharp decline of 191,000 to reach 4.086 million. Analysts were expecting a reading of 4.237 million. The more stable 4-week average number of initial claims also dropped to its lowest level in 2 years to 427,500 versus the 431,500 number registered previously. In other relevant news the Treasury will auction today $13 billion of a re-opened 30-year bond issue at noon CST in the final of three auctions scheduled for this week that totals $66 billion.