Raymond James Market Update: Treasury Yields Continue Their Upward TrendNovember 5th, 2012 by Raymond James
The markets continued their slow climb back to normalcy last week following the “Frankenstorm” that ravaged the Northeast during the final week of October. Bond markets were closed Tuesday, and upon their open on Wednesday initially saw yields push higher early in the morning as many market participants sought liquidity amidst very light trading volume. This trend soon corrected itself as demand for “safety” assets such as Treasuries became the norm for most of the week. The lone exception to the trend arrived on Friday when much better-than-anticipated nonfarm payrolls numbers hit the newswires announcing job creation of 171k on expectations of only 125k for the month of October. Even more surprising was the fact that the previous figure for September was revised upward from 114k to 148k, helping to push the reported figure above 140k for the fourth consecutive month which hasn’t happened since the window of November 2011 to March 2012. Even more important than the release itself, this was the last set of jobs-related economic data we will receive before voters head to the polls on Tuesday to decide the winner in what is being touted as potentially the closest Presidential election since Bush vs. Gore in 2000. Market participants immediately began selling Treasuries in the aftermath of the release, helping to push yields considerably higher in early morning trading. Despite the 10-yr benchmark Treasury jumping up by more than 5bp after the announcement, markets soon reversed-course and helped push yields to unchanged levels by the end of the day. Even with the transient euphoria from the positive economic news, the market still seems to hold a general “risk off” conviction pre-election and post-storm.
Stepping back to a birds-eye view on the 10-yr Treasury note, yields are continuing their upward trend first initiated back in late July. Yields bounced off their lows of 1.3875% set back on July 24th, and although there has been considerable choppiness both pre- and post-FOMC releases, we’ve generally seen an upward trend in yields since the summer. As a reminder, recent highs in yields were set just before and after the last FOMC meeting on October 24th, and soon afterward we were hit with superstorm Sandy. When taken in context of these two major events, we’ve yet to really see any normal trading in the markets since Bernanke last spoke. There appears to be some support near the 1.743% level, but it remains to be seen whether this will hold as market participants around the Northeast get back to trading and the markets get back in full-swing.
For Corporate it’s “Go Time”
As the bond markets continued to get back to normal, it only seems fitting that corporate issuance would pick up in volume, once again helping to push 2012 into the record books as one of the busiest years for corporate debt issuance in history. Depending on who you ask, it was either surprising, or not, that last week ended up setting a milestone for corporate bond issuance despite the aftermath of the storm. According to Bloomberg, nearly $17.3 billion of bonds were sold here in the U.S. on Friday making it the busiest Friday all year. As yields declined in the face of good economic news corporate issuers seem to be taking a page from the same playbook in borrowing as cheaply as possible before the uncertainty of the election sets in. According to a Bloomberg interview with Jody Lurie of Janney Montgomery Scott, the payrolls figure on Friday gave a symbolic “green light” meaning “Ok, go time, don’t wait” when it comes to borrowing before the end of the calendar year. Companies including Microsoft Corp. and Verizon Communications sold nearly $7 billion of varying maturities last week, marking the first time entrance into the debt markets since last February for Microsoft and last October for Verizon. This compares with an average daily issuance of roughly $6.1 billion and is considerably higher than the previous Friday’s issuance of a mere $2.9 billion as people began anticipating Sandy hitting the Northeast. Who can blame corporate issuers for borrowing at times like these? Spreads continue to narrow and sit at levels that are near all-time lows for industrials, utilities and even financials. For example, YieldBook data show that the average industrial bond now yields roughly 123bp more than Treasuries, down from 137bp just one month ago and well off the 174bp seen at the beginning of the year. Similar stories are being told for utility issuers which have seen their spreads decline last month and year-to-date from 147bp and 193bp respectively to a mere 135bp. As investors continue their search for yield, bonds from financial issuers now yield only 155bp more than Treasuries, down from 172bp last month and considerably lower than the 328bp investor’s demanded at the beginning of 2012.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
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