Monday, July 20, 2009

Credit Spread Recap

Updated: 20-Jul-09 10:39 ET
The 10-Year Treasury sold off dramatically last week as it gave up 36 bps to close at a 3.65% yield - a decline of over 10%. However, prices are still up significantly from when the yield hit 4.00% on June 11, 2009.
The mortgage spread narrowed 44 bps from 191 bps to 147 bps as mortgage rates dropped from 5.20% to 5.12% and the 10-Year yield rose.The 2-10 Year yield spread rose 25 bps to 265 - again mostly a result of the sell-off in the 10-Year Treasury.
The TIPS spread moved up just 1 bps this week to settle at 178 bps. So while Treasuries came under pressure, inflation expectations may not be the driving force.Instead, Treasury yields may be moving higher as the flight-to-safety trade starts to abate with "good" news developing with regard to California's budget talks and CIT's possible short-term financing deal.
The spread between the ML High Yield Master II to the 10-Year Treasury narrowed 28 bps as corporate bonds improved in light of reasonably good earnings reports.
Treasuries will likely continue to come under additional pressure this week as some of the bad news becomes "less bad."However, we still believe that the U.S. economy is facing some major hurdles in its race towards growth.
Overall macro factors will likely keep yields somewhat in check, but we continue to expect a retesting of the 4.00% yield over the coming months.

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