David Schawel’s Treasury Market Prediction…and More!

Best of the Bond Market for June 5th, 2012

Marketwatch: Long-term Treasury yields up 2nd day from lows - Yields on 10-year notes which move inversely to prices, rose nearly 3 basis points to 1.56%……Thirty-year bond yields increased 5 basis points to 2.62%, and the 7-year note yield rose 2 basis points to 1.03%. Yields on 5-year notes edged down 1 basis point to 0.67%.

iShares: Income Seekers: Do it yourself or no assembly required? – IYLD is a pre-assembled solution – an ETF comprised of other ETFs with the objective of delivering yield from diversified sources.  The asset allocation is set at 60% fixed income, 20% equity, and 20% “alternative” income sources (e.g. preferred stocks and REITs).  While the asset allocation remains static, the index is updated quarterly, and the weights for the underlying ETFs that represent each asset class are chosen based on correlation, returns, yields and volatility.

Bloomberg: Hidden Billionaire Morse A Man Behind Curtain At Villages – Morse, who owns at least four jet planes and a 147-foot yacht, has become one of America’s wealthiest real estate tycoons with the help of tax-exempt municipal bonds issued by special government entities he’s created to fund the expansion of the Villages. He plans to use more bonds, which have drawn scrutiny from Florida’s governor and the U.S. Internal Revenue Service, to help fund another 11,000 homes and 4.2 million square feet of commercial space, according to recent bond offering statements.

Bloomberg: Japan’s Debt Sustains a Deflationary Spiral - Debt service and social-security payments — generally non-stimulative — are expected to consume 53.5 percent of total outlays for 2012, compared with 54.4 percent for 2011…..debt service now accounts for 43 percent of government revenue, up from about 4 percent in the early 1970s.

BBC:  California debt: What options are available? - States do not have the option to file for bankruptcy as Vallejo did, so he says he is going to cut the budget and hopefully raise taxes.

Learn Bonds: Should California’s $16 Billion Deficit Cause Municipal Bondholders to Run? - We say no.  While California has some problems, the current spread is almost a full percent over the AAA yield curve. In other words while California municipal bonds are not a screaming bargain, investors are getting compensated for any additional risk.

Businessweek: Loans See First 2012 Loss as Citigroup Pares: Credit Markets – Leveraged loans are generating their biggest losses of the year as investors pull back from even the safest debt in a company’s capital structure.  Syndicated loans of speculative-grade borrowers lost 1.22 percent last month.

BEA: Widespread Economic Growth Across States in 2011 – Real gross domestic product (GDP) increased in 43 states and the District of Columbia in 2011…Durable–goods manufacturing, professional, scientific, and technical services, and information services were the leading contributors to real U.S. economic growth. U.S. real GDP by state grew 1.5 percent in 2011 after a 3.1 percent increase in 2010.

Bloomberg: Pennsylvania Readies Bond Sale For Jobless-Benefit Loans – Pennsylvania’s Senate passed a bill to let the state sell as much as $4.5 billion of bonds to repay federal loans for jobless benefits, which would be the largest such offering in the U.S.  “There are better rates through bonding than those being charged by the federal government through interest,”

Bloomberg: Alabama Officials File $1.6 Billion Claim Against County – State and city officials in Birmingham, Alabama, filed a $1.63 billion claim in Jefferson County’s bankruptcy case on behalf of sewer system ratepayers, alleging county employees engaged in criminal conduct.

StockTwits University: How to Trade and Read Treasury ETFs - f you do not trade or invest in treasury ETFs, use them at least to gain insight into the mood of the market. For example, Harmon likes to compare the 20+ year treasury ETF $TLT to the High Yield ETF $JNK. Together, these two ETFs measure the risk appetite in the market.

The Financial Lexicon: High Yield Spreads Reach 2012 Highs – keep in mind that while spreads are reaching new highs for 2012, effective yields are actually closer to their lows of the 2004 to 2007 time period than anywhere near their highs of the past two recessions. Ultra-low Treasury yields help explain why it is that spreads can be as wide as they are with yields as low as they are.

Bond Buyer: Muni Market Post: New Issues Draw Focus - “The secondary is a little slow today with new issues in the market, but from what I’ve been hearing deals are going fairly well,” a New York trader said. “Some guys are a little heavy from last week, but with June reinvestment money kicking in we’ll have to see. New deals will dictate what will happen this week.”

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