Bond/Stock Divergence Reaches all Time High…..Google Bets on ABS…and more!

Best of the Bond Market for August 7th, 2012 

Pragmatic Capitalism: The current divergence between stock prices and bond yields is at it widest level this century. – While the markets push forward on “hope” for more intervention by Central Banks – the bond market is signaling that it is not so sure help is coming any time soon.

Calafia Beach Pundit: Another take on the disconnect between stocks and bonds – My interpretation of all this is that equity prices are improving not because the economy is getting stronger, but because the economy is not deteriorating to the extent reflected in bond yields.

Learn Bonds:  Make sure your expectations are correct before moving further out on the credit risk spectrum – By looking at the spread between investment grade and high yield corporate bonds, you can see how much extra return is being offered for taking on additional risk.

FT: The corporate bond market is currently like a “Buffet line with two doors” and is running out of prime rib.   – Pouring in from one end are cautious types who might normally buy super-safe government debt, but who are now favouring the bonds of large, high-quality companies in search of a decent investment return.

WSJ: Google buys hundreds of millions worth of bonds backed by credit card and auto loans – Google, the fourth-most cash-rich company in the S&P 100 after General Electric Co., Goldman Sachs Group Inc. and Microsoft Corp., according to FactSet, isn’t alone in piling into these offerings.

WSJ: Boston Fed President calls for more aggressive “open ended” bond buying program – Mr. Rosengren said the Fed should buy more mortgage-backed securities and possibly U.S. Treasury securities in an open-ended program, and state that it will continue to buy bonds “until we start seeing some pretty significant improvements in growth and income.”

ETF Trends: VRD and EMCD bond ETFs halted after erratic trading – “Unlike last Wednesday’s Knight mishaps, today’s ‘low prints’ in those two ETFs appear to be ‘clearly erroneous’ trades and are likely to be amended,” said Paul Weisbruch at Street One Financial in an email Tuesday.

Reuters: State budgets turning the corner with only CA and WA projecting 2012 deficits. – At the same time, resource-rich states like Alaska, Wyoming and North Dakota expect big balances for fiscal 2012, which ended on June 30 for most states.

Reuters: Janney recommends keeping Puerto Rico exposure to under 10% as country “turns to lottery to light up gray economy”.  Urgently looking to boost revenue after six years of recession, government officials hope the island’s sales-and-use tax lottery — or IVU (impuesto sobre ventas y uso) Loto, as it is called in Spanish — will jump-start collection of sales taxes, which came in below expectations in the fiscal year ended in June.

Barrons: After returning over 9% year to date some feel that high yield has little room for further price appreciation – “At current levels, HY is standing only 20bps away from its all-time historical low yield of 6.7%, and its premium price of 102.1pts leaves today’s buyers with little hope for price appreciation.”

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