US Treasury yields rose to two year highs, with the 10 year note yielding around 4.84%-4.86% yesterday (Thursday), 10bp-12bp more than last Friday.
Rising yields brought the 5% coupon back to the sovereign and supranational sector ? but that was not enough to calm investors? nerves and tempt them back into the market.
Two benchmark $1bn 10 year dollar bonds, a global from the European Bank for Reconstruction and Development (EBRD) and a Eurobond from Austria, failed even to sell out at pricing.
Still the waiting goes on. The news that the US economy created 288,000 new jobs in April, compared to the consensus forecast of 173,000, has set the stage for a 25bp rate rise at the FOMC?s meeting in June ? but the market is looking for confirmation to the CPI inflation data, due out today (Friday).
?Everyone knows the Fed will be looking at the inflation numbers as confirmation that a rate hike is needed sooner rather than later, so the market is very much focused on them,? said one bond syndicate manager. ?It has been a big shift for this market. Even though we knew a rise in rates was coming for a while, this market has a mob mentality and expectations of the timing of the hike have gone from November to August to June in just a couple of weeks.?
The fall in Treasury prices continued all week, despite a solid response to the Treasury?s $54bn refunding exercise. The three, five and 10 year auctions all went well, and the 10 year sale on Thursday attracted the best demand for almost three years, with bids of 2.78 times the $15bn of debt on offer.
The US high grade bond market continued to be sapped by rate fears. The 10 year dollar sector, in particular, had been expected last week to enjoy strong demand, but the 10bp rise in 10 year Treasuries in less than a week convinced some investors they should wait until some stability returned to the market.
While some deals attracted strong interest ? notably EnCana?s $1bn 10 year bond (see separate story below) and Thomson Corp?s $250m six year issue ? investors were mostly determined to stay on the sidelines, at least until after today?s consumer price index numbers.
By yesterday only $1.8bn of corporate bonds had been issued by five US borrowers.
?We saw some retail interest coming in at the higher yield levels earlier in the week, but the pace of the sell-off in Treasuries has been enough to put investors in a cautious mode,? said Simon Ballard, credit strategist at Bear Stearns. ?Until we get stability in the equity and Treasury markets, real money accounts will tend to stay on the sidelines.?
Corporate bond spreads measured by indices were wider by about 10bp on the week, with the greatest weakening seen in the auto sector.
The tense situation in the market led Standard & Poor?s to question whether a repeat of 1994 can be expected. At that time some financial institutions that had been funding long term assets with short term liabilities were caught out when the Federal Reserve raised rates by 3% in a year.
The institutions rushed to unwind their positions by selling longer term bonds, putting pressure on rates that subsequently popped, increasing the cost of funding for all issuers.
S&P pointed out in a report this week that the yield curve in 1994, with a 300bp gap between the short term Fed Funds rate of 3% and 10 year Treasury yields, was similar to today?s situation, when the gap is 350bp with the Fed Funds at 1%.
The agency said it was unlikely things would be so bad this time, since the rate rises are expected and are likely to be slower ? S&P forecasts 1.5% by year-end and 4% by the end of 2005.
Credit quality is also on an improving trend, the agency believes. However, Diane Vazza, head of S&P?s global fixed income research group, warned: ?There remains the risk that rates could jump as some financial institutions exit their positions.?
