Fast loans approvalNEW YORK (Dow Jones)--A better-than-expected payroll report put pressure on Treasurys, but set a positive tone for the corporate bond market.
The national jobless number grew by 345,000 in May, versus expectations for 525,000 in new jobless claims filed. The rate of unemployment shot up to 9.4% from 8.9%, inching closer to the 10% rate that many had expected by year end.
Though there were some concerns about likely distortions of the data, Bill Larkin at Cabot Money Management said the numbers show the economy "is turning in the right direction."However, some analysts focused on the unemployment rate, and noted that it would hurt consumers ability to repay loans. Already nearly 10% of mortgages in the nation are delinquent, said Martin Weiss, CEO of Weiss Research.
"With unemployment now nearing 10% as well, many more are likely to default, driving home prices down again," he said.Shorter-maturity Treasurys posted steep losses Friday as expectations grew that policy makers could raise rates sooner than expected after another batch of better-than-anticipated data.
The move marks a change for the bond market, which for months had maintained very stable short-end yields given the belief that the Fed's 0%-to-0.25% rate range would be in place for a while.The two-year yield had jumped by 31 basis points in afternoon trading, compared with the 10-year Treasury yield, which was just 13 basis points higher. The two-year note was yielding 1.26% in recent trading, a level last hit in November 2008.
Earlier, the 10-year yield had pushed up to 3.91%, a fresh year high, but it then fell back as the day progressed with shorter maturities bearing the brunt of the selloff. The benchmark Treasury yield curve, the gap between two- and 10-year yields, flattened to 259 basis points from 275 basis points Thursday."The market is building in a tightening by the Fed sooner rather than later," said Andrew Brenner, senior vice president at MF Global in New York. Brenner called Friday's move one of the biggest turnarounds in the yield curve in years. Brenner also noted that negative rates in the government securities repurchase market, or repo market, were adding to the Treasury market's volatility.
Investment-Grade Corporates
The investment-grade corporate bond market maintained a positive tone Friday.
Demand is expected to only continue for new high-grade bonds. Insurance companies and foreign investors, who own about 40% of high-grade bonds, may increase their purchases later this year, wrote JP Morgan analysts in a note. Insurers had been dormant as they hoarded cash to improve capital ratios, but they now have relatively high cash balances. Foreign investors may increase their purchases after the strong rally in credit spreads, the analysts said.Meanwhile, Rio Tinto bonds surged after the company said it is terminating its planned $19.5 billion alliance with Aluminum Corp. of China, or Chinalco. The spread on a 8.95% note due May 2014 was 89 basis points tighter to 352 basis points and on a 9% note due May 2019 it was 84 basis points tighter to 352 basis points as well, both on 31 trades, according to MarketAxess.
The benchmark high-grade credit derivatives index, the Markit CDX North America Investment Grade derivatives index, was quoted 2.1 basis points tighter to 120.5/121.5 basis points, according to Markit.
Meanwhile, S&P cut the counterparty credit, financial strength, and financial enhancement ratings on MBIA Insurance Corp. one notch to BBB Friday due to "increased loss assumptions on its 2005-2007 vintage direct RMBS and CDO of ABS and a change in the assumed tax benefit of tax-loss carryforwards."
Agency Mortgages
Agency mortgage-backed securities were tighter Friday, as investors sought to buy higher coupon bonds. Risk premiums on the current coupon was 4 basis points tighter at 151 basis points over comparable Treasury yields. Meanwhile, prepayment reports for May showed little sign of the expected rapid increase from the government's Home Affordable Refinance Program, Barclays analysts say.
Freddie Mac paydowns of 30-year loans rose 8%, and Fannie's 13%. Total paydowns was nearly $82 billion for the month, about 10% more than in April. This is well short of the 15% to 30% expected earlier.
There was little good news on the rate front for homeowners looking to refinance or potential homebuyers. The selloff in the Treasury market and the continuing widening of risk premiums on mortgage bonds has pushed the rates homeowners pay on mortgages to 5.46% Friday from 5.35% Thursday, according to bankrate.com.
Excerpt From : online.wsj.com