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BOND MARKET RECAP

By Rom Badilla, CFA – Bondsquawk.com

U.S. Treasuries tanked as yields spiked and after the flight-to-quality trade subsided today due to the announcement across the Atlantic. The yield curve steepened today after flattening for most of this month and April. The yield differential between 2’s and 10’s increased 5 basis points to a spread of 268 basis points. The yield on the 10-Year increased by 11 basis points to 3.54 percent while the 2-Year widened 6 basis points to a yield of 0.86 percent. The yield on the 5-Year increased 10 basis points to 2.26 percent while the Long Bond underperformed the rest of the curve as the yield rose by almost 14 basis points to 4.41 percent.

10-Year Treasury Yield – Historical Chart

Credit spreads tightened in as risk pressures eased. The spread on Bank of America Merrill Lynch U.S. Corporate Index, which contain over four thousand investment grade issues, tightened by 7 basis points from last week’s close to 177 basis points. The spread over comparable maturity Treasuries on the High Yield Index declined to 625, a tightening of 22 basis points.

Merrill Lynch High Yield Index Spread

Greek bonds posted an impressive rally today after the EU’s announcement.  The yield curve is practically flat after becoming inverted as the debt crisis escalated. 2-Year Greek bond yields decreased to 1073 basis points to 7.53 percent. The yield on the 5-Year declined to 7.71, a change of 688 basis points while the 10-Year rallied as the yield tightened 468 basis points to 7.77 percent.

Greece Yield Curve Change

Portugal, which was next in the firing line before the announcement, has seen its borrowing costs decline as well. The yield on the 2-Year is at 2.95 percent, an decrease of 310 basis points. 5-Year yields finished trading at 3.86, an decline of 222 basis points while the 10-Year dropped 163 basis points to 4.65 percent.

Spanish 2-Year bonds tightened to a yield of 1.91 percent, a drop of 94 basis points. The yield on Ireland’s 2-Year declined 297 basis points to 1.56 percent while the yield on 2-Year Italian bonds decreased by 81 basis points to 1.53.

Stocks rallied as the S&P 500 advanced 4.4 percent. The Volatility Index aka VIX dropped 29.6 percent or 12.1 points to 28.84.

The Euro had a volatility day despite the good news. The Euro reached an intraday high of 1.3094 before a late afternoon sell-off. The Euro closed at 1.2787, an increase of 0.2 percent from the previous close. The Dollar Index increased 0.1 percent to 84.24.

Is the Flight-to-Quality trade over? Visit our forums and post your prediction on the 10-Year.

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