Treasuries are slowly but surely regaining their bid as investors reassess the overall strength of the economy while looking to take advantage of the back up in yields over the past month. Since early April, Treasury yields have risen by 40 basis points in the two- to five-year sector and by 22 basis points on the longer end. Much of this back up in yields can be attributed to the extraordinarily high level of supply that has inundated the markets over the past month. This includes $50 billion of 2- and 5-year Treasury notes in late April, and $21 billion of 10- and 30-year notes and bonds over the past two days. With the completion of the Treasury’s 30-year auction yesterday, supply concerns are dissipating and the dealer community and large accounts are capitalizing on the higher yields.

On the day, Treasury yields across the coupon curve declined by 10 basis points leaving the 2-10 year spread essentially unchanged at 156 basis points. In the credit markets, swap spreads to Treasuries continued to tighten, leading to narrower spreads on agency, investment grade corporate securities and MBS. Agency (Fannie Mae and Freddie Mac) “bullet” securities tightened by two basis points across the yield curve. More striking is the fact that since mid-April, three-year agency benchmark spreads have ratcheted tighter by 25 basis points. Likewise, yield spreads on agency MBS and investment grade corporate securities have narrowed to their Treasury counterparts by 40 and 30 basis points respectively.  

Regarding portfolio strategy, the Fed’s stabilization measures (TAF, TSLF, and Fed Funds rate cuts) have increased liquidity across the spread product spectrum. Within the spread products we continue to maintain our overweight recommendation on the MBS, as renormalization in risk appetite continues amidst a full court press by the Fed/Congress/administration. While spreads have tightened quite dramatically since the height of the debt crisis, spreads still remain historically wide (97th percentile over a ten-year history) and should grind tighter in a "Fed on hold"/declining volatility environment.
 
Today, the only economic release is the report on the U.S. Trade Account Balance for March. Consensus expectations have the trade deficit narrowing slightly to $61 billion (versus $62 billion in February) due to the benefits to exports from a declining greenback. Next week, the economic calendar fills up with a number of first tier economic indicators including Retail Sales, CPI, Industrial Production and Housing Starts.

 

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