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August 10th, 2012

• Treasuries Stopped the Bleeding but Corporates Fall
• Improving Economic Data May Undermine Fed’s Dovish Plans
• Top 5 High Quality Corporate Bonds
• Mortgage Applications for Purchases Continue to Trudge Sideways
• Bearish Bias for U.S. Treasuries as Yields Break Key Support
Treasuries Stopped the Bleeding but Corporates Fall
Posted: 09 Aug 2012 12:30 PM PDT
By Rom Badilla, CFA
August 9, 2012
Similar to yesterday, demand for safe-haven securities declined as interest in the new Long Bond fell at today’s scheduled 3-Year auction. The U.S. Treasury sold $16 billion in 2.5% coupon paying bonds maturing in August 2042. The bonds at auction reached a high of 2.825% with a median yield of 2.765%.
The bid-to-cover ratio, which is the number of total bids per the total amount of bonds offered and is a gauge of demand, came in at 2.41. The ratio is done from the previous auction of 2.70 and the average for the past year of 2.64. Furthermore, non-primary dealer investors that place their bids directly with the Treasury purchased only 7.7 percent, down from 20.1% at the prior auction.

Bid to Cover Ratio
As a result, Treasury yields across the maturity spectrum moved higher after the auction. However and luckily for bond bulls, yields reversed near the close as prices pared back their losses to finish roughly flat on the day. The yield on the 10-Year U.S. Treasury concluded the day at 1.69%, a rise of a basis point from the previous close. The old Long Bond was flat at 2.76%. The yield on the 5-Year finished trading at 0.73%, an increase of a basis point from the previous close while the 2-Year was unchanged on the day at a yield of 0.27%.

Bond Investing – 10 Year Yield Intraday
In Europe, Peripheral 10-Year yields were slightly lower while bonds in developed economies were flat. Spain’s longer dated benchmark note dropped 2 basis points to close at 6.85% while Italy ended the day at 5.86%, a fall of 4 basis points. Both German Bunds and U.K. Gilts each edged a basis point to end at 1.43 and 1.62%, respectively.
Despite the flat action in Treasuries, bonds in the Corporate Sector sold off in price and yields increased according to Trade Monster’s Bond Trading Center. The Financial Sector on average with our sample of longer-dated maturity bonds, increased in yields by 4 basis points. Bonds in non-financial space fared better as yields in our Industrial Sector basket widened just 2 basis points.

Bank of America 10-Year bonds underperformed as the price fell from $113.37 to $112.79 for a decline of 0.5%. At today’s price, the banking giant offers a yield of 4.06%, an increase of 7 basis points from yesterday.
In Industrials, Anheuser-Busch 10-Year bonds widened 3 basis points to 2.41% while Kraft and Microsoft benchmark bonds increased 4 and 3 basis point, respectively.
The U.S. employment picture continues to show signs of improvement as less people filed for unemployment benefits than the prior week. The U.S. Department of Labor reported that Initial Jobless Claims for the week ending August 4 declined by 6,000 to 361,000 people. This decline was better than expectations since the median forecast by economists was at 370,000 individuals.
Despite the drop, the 4-Week moving average increased slightly by 2,000 to 368,000 people. In order for job creation to accelerate, Initial Jobless Claims average typically needs to drop below 400k and stay there for a period of time.
Furthermore there was no mention of special factors affecting the data such as the seasonal auto-sector adjustment as mentioned in the previous weeks. Hence, this week’s release and data going forward should be without distortions and should give a clearer picture of the employment environment.
On a separate note, international trade improved for the U.S. as the level of exports relative to imports grew suggesting better demand abroad for U.S. goods. The U.S. Trade Balance narrowed from a revised deficit of $48.0 billion in the previous month to a deficit of $42.9 billion to June. This surprised forecasters as the median projection by economists was calling for a greater trade shortfall of $47.5 billion.
Hence, the growth in exports coupled with aforementioned improving Claims, is a positive development for GDP growth and for the U.S. economy.
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The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Improving Economic Data May Undermine Fed’s Dovish Plans
Posted: 09 Aug 2012 11:00 AM PDT
By Rom Badilla, CFA
August 9, 2012
The U.S. employment picture continues to show signs of improvement as less people filed for unemployment benefits than the prior week. The U.S. Department of Labor reported that Initial Jobless Claims for the week ending August 4 declined by 6,000 to 361,000 people. This decline was better than expectations since the median forecast by economists was at 370,000 individuals.
Despite the drop, the 4-Week moving average increased slightly by 2,000 to 368,000 people. In order for job creation to accelerate, Initial Jobless Claims average typically needs to drop below 400k and stay there for a period of time.
Furthermore there was no mention of special factors affecting the data such as the seasonal auto-sector adjustment as mentioned in the previous weeks. Hence, this week’s release and data going forward should be without distortions and should give a clearer picture of the employment environment.
In their latest Global Markets Research Data Flash, Deutsche Bank’s economist Joseph LaVorgna provided his take and how it could affect the next U.S. Jobs Report scheduled for September 7.
“In summary, today’s report is a mild positive for the labor market given the fact that the 4-week moving average (368k) remains near the post recession low set during the week of March 31 (363k). At the margin, assuming we do not see a large uptick in claims over the next two weeks, we would expect August payroll growth to at least match that of July, if not exceed it.”
On a separate note, international trade improved for the U.S. as the level of exports relative to imports grew suggesting better demand abroad for U.S. goods. The U.S. Trade Balance narrowed from a revised deficit of $48.0 billion in the previous month to a deficit of $42.9 billion to June. This surprised forecasters as the median projection by economists was calling for a greater trade shortfall of $47.5 billion.
The trade gap narrowed due to a decline in petroleum imports as well as an increase in exported goods according to LaVorgna. The Deutsche Bank economist added the following color:
“The gain in the latter is interesting to note as many analysts fear an exports sector slowdown due to deteriorating growth in Europe and Asia. What they forget is that the two largest export markets for the US are Canada and Mexico (approximately 32% of total exports).”
Hence, the growth in exports is a positive development for GDP growth and for the U.S. economy
“In terms of GDP, the decline in the trade balance boosted real GDP growth for the second quarter by about seven tenths of a percent. Combined with the revisions to construction spending, it now looks like Q2 real GDP growth was approximately 2.4% (annualized).”
Given this coupled with Claims staying the course, which in turn could result in another positive print from the next jobs report in Non Farm Payrolls, the Federal Reserve may have enough evidence that the economy is not slowing down and job growth is escalating. If that is indeed the case, then any talk of Quantitative Easing may not be in the cards for the September meeting.
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Top 5 High Quality Corporate Bonds
Posted: 09 Aug 2012 09:00 AM PDT
By Rom Badilla, CFA
August 9, 2012
Tired of Owning Lower Yielding Treasuries? These Corporate Bonds are Higher Quality on the Investment Grade Spectrum with the following criteria:
 Rated AA and AAA by Standard & Poor’s and provide a Yield Pickup to U.S. Treasuries (Investment Grade ranges from AAA to BBB- while High Yield and Speculative Grade range from BB+ to CCC-)
 These bonds are actively traded in two-sided markets (minimum bid and ask size of $5,000) and must have a deal size greater than $250 million to ensure sufficient liquidity
 Sample does not include Financial bonds which typically exhibit greater yields that usually translates to more yield volatility and hence greater price risk despite similar ratings
 Fixed coupon that pays semi-annually
 U.S. Dollar Denominated
 Groups separated by Maturity, 4 to 7 six years and 7 to 10 years
 Sorted by Ask (Offered) from Highest to Lowest
Information and quotes provided by Trade Monster’s Bond Trading Center

Mortgage Applications for Purchases Continue to Trudge Sideways
Posted: 09 Aug 2012 07:00 AM PDT
By Rom Badilla, CFA
August 9, 2012
The Mortgage Bankers Association released its weekly data showing that total mortgage applications filed in the U.S. dropped 1.8% despite relatively low rates. After breaking down the numbers, refinancing activity declined by 2% from the prior week while mortgage applications to purchase a home fell a percent.

MBA Mortgage Applications Purchase Index
The sideways action in the Purchasing Applications Index continues to be troubling since the signals have been mixed. The recent Federal Reserve Loan Officer’s survey states better residential loan demand implying a possible turnaround for homeowners. However, the fact remains that the MBA’s measure of activity which covers over 75 percent of all U.S. retail residential mortgage applications, remains near the bottom despite the historical lows in interest rates. Hence the housing market has a lot of wood to chop before we can see a significant rebound. For right now given the mixed signals, it seems stabilization remains the theme for now.
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Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

Bearish Bias for U.S. Treasuries as Yields Break Key Support
Posted: 09 Aug 2012 05:00 AM PDT
By Rom Badilla, CFA
August 9, 2012
As mentioned several days ago, a break past key support at 1.60% for the 10-Year U.S. Treasury may lead to a push higher which is a stark reversal of the bullish sentiment from just a few weeks ago.
With the 10-Year currently trading at 1.65%, Credit Suisse technical analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain now favor a bearish bias given the recent developments in the Treasury market:
10yr US yields remain under pressure and have extended the sell-off through 1.60%. We remain bearish and target of chart props at 1.675/70% next. We would look for this to hold at first, but expect an eventual break through it to solid intermediate support at 1.73/77% – the June chart high and the 38.2% retracement of the entire March-July rally. We look for this to hold and the broader bull trend to resume from here.
Below 1.60% aims at 1.55%, then 1.53%. Removal of 1.445/435% is need to retarget the record lows and trend resistance at 1.39/37%.

Beyond the aforementioned support they see key levels at 1.88/89%.
Currently, they are flat or do not have a position but look to short the 10-Year should the yield reach 1.60% with a Stop-Loss set at 1.53%. Their new target is at 1.72%, which is a change of 12 basis points. Given that the 10-Year has a duration of 8.9 years, the expected price gain for the short position would be 1.1% (8.9 Years X 12 basis points = 1.1% Price Gain).
In similar fashion, the Credit Suisse team sees a bearish bias for the Long Bond as the 30-Year U.S. Treasury extended key support at 2.70/2.72%.
30yr US bonds have maintained the break through support at 2.70/72% – trend props and the 61.8% retracement of the June-July rally. This leaves us bearish for 2.78% next then 2.83% with more solid levels at 2.85/855%, which we look to attract significant buying.
Below 2.69/68% aims at 2.50/49%. Extension through here is needed to retarget the 2.45/44% barrier.

Beyond the 2.85 support levels, they see support further out at both 2.90% and 2.98%.
As with the 10-Year, they are currently flat and look to short or sell the 30-Year at 2.70% with a Stop-Loss of 2.64%. Their target would be 2.83% for a change of 13 basis points. With the Long Bond duration at 19.8 years, the price gain for the short in the event of a backup in yields would be 2.6%.
Be sure to check out our popular Bond University if you like this post. In addition, check out this article posted in the Trading & Investing Strategies section for ways to enhance returns by using margin.
Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

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