ECONOMIC AND BOND MARKET RECAP

By Bondsquawk:

U.S. Treasuries rallied and stocks fell as weak economic data suggested a loss of momentum in recovery. Stocks pared some of its gains from yesterday while Treasuries more than made up for its losses.

Economic Data

Today’s economic data releases suggest that the U.S. recovery may be slowing as we head into the second half of 2010.  The Commerce Department released figures that both Personal Income and Personal Spending failed to grow in June, following a tenth of a percent downward revision in the May readings to final levels of 0.3 and 0.1 percent, respectively.  June’s flat readings disappointed economists as surveys called for an increase of 0.2 percent in Personal Income and a move higher of 0.1 percent in Personal Spending.

Factory Orders unexpectedly dropped in June giving more reason of a slowdown in manufacturing activity, according to the U.S. Department of Commerce.  Factory Orders fell by 1.2 percent versus surveys of a decline of 0.5 percent.  To add insult to injury to the disappointment of missing expectations, the prior period’s reading was revised downward from an initial release of -1.4 percent to a final -1.8 percent.

Pending Home Sales dropped 2.6 percent on a month over month basis in June as government tax incentives expired for prospective home buyers.  Economists were expecting a bounce of 4.0 percent after May’s massive decline of nearly 30 percent.

Finally on the economic data front, the Bureau of Economic Analysis released its Personal Consumption Expenditures Price Index (PCE) which is another gauge of inflation and price pressures.  The PCE Core index was flat for June as surveys called for a month over month increase of 0.1 percent.  In addition, PCE Core for May was revised downward by a tenth of a percent to a final reading of an increase of 0.1 percent.  Given this data, inflation expectations should remain subdued in the coming months.

For more details on today’s economic data releases, click here.

Interest Rates

Treasuries rallied as rates declined across the curve, led by the belly, which declined the most. The 5-Yr bond gained the most at yields fell by 10 basis points to 1.54%. The yield on the benchmark 10-Yr bond fell 6 basis points to 2.90%. The Long Bond fell 3 basis points to finish at 4.03%. The 2-Yr set yet another record today, reaching its lowest level in history. It rested at 0.53%, after reaching an intraday low of 0.51%, which is its lowest till date. The 2-yr set and beat its lowest record more than thrice since July, with its last record low of 0.55% on July 30.

Inflation expectations, as indicated by the yield differential between 10-Yr Treasury and TIPS, fell to as low as 1.77% before bouncing back and ending at 1.83 percent.

Across Europe, government yields fell on today’s poor economic data. Among developed nations, Germany’s 5-Yr Bunds fell 10 basis points to 1.58% as France’s 5-yr followed suit to close at 1.86%. 5-Ur U.K. Gilts fell 6 basis points to 2.02%

For peripheral countries, yields fell across the PIIGS nations.  Portugal witnessed its 5-Year benchmark note tighten 9 basis points to 3.91%.  Ireland’s 5-yr bond fell 9 basis points to 3.86%, while Italy’s 5-yr dropped 5 basis points to 2.65%.  5-yr Greece bond shed 10 basis points to 10.55%, as Spain’s 5-yr government bond fell 9 basis points to 2.81%.

Credit Markets

For performance of high grade corporate bonds, check today’s ITB Corporate Bond Indices. The July performance of the iTB Indices show that corporates rallied and outperformed Treasuries.

The BofA Merrill Lynch U.S. High Yield Mater Index widened by a basis point to a spread of 655 basis points or 6.55% over Treasuries with comparable maturities.

The difference in yield between 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury tightened by a basis point to a spread of 64.

Across the Capital Markets

Stocks pared their gains from yesterday on today’s weak economic data. The S&P 500 shed 0.48% to end at 1120.46. The NASDAQ lost slightly over 0.5% to close at 2283.52. The CBOE VIX gained 2.3% to end at 22.63.

The Dollar Index, which measures the value of the dollar by comparing it to 6 major currencies of the world, lost 0.4% to close at 80.60.  The Euro gained 0.4 percent to 1.3232 as the British Pound followed suit to 1.5886.

Gold spot prices gained modestly by 0.2% to 1186.00.

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