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By Rom Badilla, CFA – Bondsquawk.com

U.S. Treasuries rallied across the curve, led by the front-end on Friday as economic data suggest that the recovery may stall and after the announcement of the Spain downgrade. The yield on the 2-Year declined 11 basis points to close the week at 0.77 percent. The 5-Year rallied as the yield tightened 10 basis points to 2.09 percent. The 10-Year closed at 3.29, a decrease of 7 basis points while the Long Bond declined 5 basis points to a yield of 4.21 percent.

10-Year Treasury Yield Intraday Chart

After getting back to even with last week’s highs, the spread on 2-Year interest rate swaps bounced back to 45 basis points, an increase of 5. The spread on 5-Year swaps closed out at 34 basis points, an increase of 4

The LIBOR-OIS spread declined a basis point to 30, which implies that pressure on the flow of funds between banks is subsiding.

The credit markets were fairly quiet as spreads were flat from yesterday with the exception of High Yield. The BofA Merrill Lynch High Yield Index widened 2 basis points to end the month at 690 spread over comparable maturity Treasuries. Despite the modest widening today, spreads have been extremely volatile as the spread soared 129 basis points from the end of April as investors sold out of risk. Similarly, the US Corporate Master Index which contains four thousand investment grade securities widened 47 basis points to end the month at a spread of 202.

BofA Merrill Lynch High Yield Spread over Treasuries for May 2010

The yield differential between 30-Year Conventional Mortgage Backed Securities priced at Par and the 10-Year Treasury declined 2 basis points from yesterday to 84. The spread has widened since the end of April by 11 basis points as investors favored Treasuries. The 30-Year mortgage rate that is available to home buyers according to Bankrate.com is at 4.87, an increase of a basis points from the prior day.

The S&P 500 declined 1.2 percent to 1089.41 while the Nasdaq closed at 2257.04, a loss of 0.9 percent. The VIX jumped back to 32.07, an increase of 8.1 percent.

The Dollar Index gained 0.6 percent to 86.781. The Euro ended the volatile week at 1.2273, a decline of 0.7 percent. The British Pound dropped 0.8 percent to 1.4458.