April 16, 2012 US Fixed Income Commentary

If Treasuries were rallying due to a flight to quality, people wouldn’t be buying stocks so the more likely driver would be speculation about another round of quantitative easing. The possibility of continued mortgage backed securities buy backs to support the US housing market seems credible but it would take a significant deterioration in US economic fundamentals to trigger more Treasury buy backs. Tomorrow we get housing starts, building permits and industrial production data for March which should be important since Federal Reserve officials have signaled that their policies will be data dependent. We also get $2 billion of Fed buy backs in the long end followed by $5 billion of 10 year buy backs on Wednesday and another $2 billion of 10-20 year bonds on Thursday so that should limit the damage should we get stronger than expected data. Market focus will also be centered on the Spanish and Italian debt saga. As Spanish 10 year yields broke above 6% today, credit markets traded heavy but equities showed strength so possibly that was QE speculation. Spain will attempt more bond auctions on Thursday and without any ECB support markets may hesitate. Despite Treasuries rallying throughout the day, by the close they moved back to unchanged. High grade credit spreads were mixed, with banks a couple tighter, telecom a couple wider and basic materials unchanged.

Lat Am low beta sovereign bonds were generally better bid though prices were locked in a holding pattern. Chile rallied another ¼ point, in line with Treasuries. Venezuela attempted an early rally, with CDS tightening 10 bps and bond prices rising ½ point in the morning, but then profit taking pushed levels back to only slightly better on the day. The question of whether a YPF nationalization was priced into Argentine sovereign levels was answered today as bonds fell almost 3 points and CDS spreads widened nearly 50 bps after President Kirchner proposed a seizure of 51% of the company.