Monday Bond Market Recap

By Maulik Mody

Stocks extended gains and Treasuries ended slightly weaker as investors continued to bank on hopes that the Fed will start purchasing securities to sustain the faltering recovery. The Dow Jones gained to its highest level in almost six months. The government Monday sold 5-Yr TIPS at a negative yield for the first time as investors continued to buy TIPS to protect themselves against the risk of inflation. Speculation that the Fed’s actions of further monetary easing will sustain the recovery drove yields lower. Existing home sales improved in September while the Chicago Fed reported slower manufacturing activity.

Economic Data

According to the Federal bank of Chicago, economic activity in the US damped during September. The Chicago Fed National Activity index fell to -0.58 in September versus a reading of -0.49 during the previous month. This pulled the 3-month moving average slightly lower to -0.33. Sub zero levels indicate slowing economic growth and easing inflation pressure. A 3-month reading below -0.70 suggests that there is a high probability that the economy has entered into a recession.

While on one hand the Chicago Fed index suggested a slowing economy, a record jump in existing home sales during September showed signs that the housing market might be recovering. Fueled by cheap borrowing costs, existing home purchases increased 10% to an annual rate of 4.53 million as reported by the National Association of Realtors. Single family home sales increased 10%, while condos and co-ops saw a 9.8% increase in sales.

In other positive news for the economy, the Dallas Fed Manufacturing Outlook level improved to 2.6 in October from -17.7 for the previous month, beating expectations of -8.0. The production component of the index gained to 6.9 from 4.0 for the previous month. Orders growth rate fell to -2.5 from 0 in September. Inventory still lies in the negative zone but has been improving since three months. Capacity utilization fell to -2.3 after rising to 3.0 last month.

Interest Rates

Treasuries ended slightly lower and yields pushed higher as investors continued to speculate that the Fed will declare another round of asset purchases in its meeting next week. The yield on the benchmark 10-Yr ended slightly higher at 2.56%. The 30-Yr bonds last traded at 3.91%. The 5-Yr bond fell slightly as its yield increased to 1.18%. The 2-Yr last traded at 0.36%.

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Inflation expectations, as seen in the yield differential between the 10-Yr and the 10-Yr inflation protected index (TIPS), widened 5 bp to 2.17%. The government Monday sold 5-Yr TIPS at a yield of negative 0.55%.

Yields across European countries mostly slid lower as government bonds rallied in price. The 5-Yr France bond traded 4 bp lower at 1.83%. %-Yr German Bunds slid 3 bp to 1.64%. The U.K. Gilts were mostly flat at 1.465%.

Yields were lower among peripherals too. Portugal’s bond rallied as yield slipped 17 bp to 4.28%. Italy’s benchmark bond traded 5 bp lower at 2.68%. Greece’s 5-yr bond gained as yield pushed 4 bp lower to 9.47%. Spain’s benchmark bond traded 7 bp lower at 2.91%.

Across The Capital Markets

Stock markets advanced on what seems like increased betting by investors that the Fed will start securities purchase to speed recovery. The S&P index gained 0.2% to 1185.62. NASDAQ jumped 0.5% to 2490.85. The VIX Volatility gained to 19.85 from 18.78 at last week’s close.

The Dollar DXY index, which measures the performance of the US dollar against six major currencies around the world, ended weaker at 77.103. The Euro gained against the greenback to 1.3965. The cable (GBP/USD) gained to 1.5723.

Gold gained on the first day of the week to 1339.85. Crude oil spot price increased by 1% to 82.52.