Bonds Recover to 6% as Focus Shifts to Ford

With no significant economic releases to speak of, the market zoned in on the massive corporate and agency offerings hitting the market.
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An early-morning slide turned into afternoon revelry in the Treasury market today, but investors were paying more attention to supply than the sharp turnaround. Hungry investors were fed $3 billion by

Freddie Mac

(FRE)

today, and they're lining up for

Ford's

(F) - Get Report

expected $6.5 billion in bonds tomorrow.

The 30-year Treasury bond continued to rise in the late afternoon, and was lately up 22/32 to 89 23/32, and the yield fell 5 basis points to 6%. With no significant economic releases to speak of, the market zoned in on the massive corporate and agency offerings hitting the market.

Well, massive and

monstrous

. Federal agency Freddie Mac sold a ho-hum $3 billion in five-year notes this morning. But what's really on the market's mind was today's launch of Ford's deal, divided into $1.5 billion in 32-year bonds, $3.5 billion of five-year notes, and $1.5 billion in three-year, floating-rate notes. The latter two tranches will be issued by

Ford Motor Credit

, a financing arm of Ford. The issue, expected to be priced tomorrow, would be the second-largest corporate bond sale in history, trailing only

AT&T's

(T) - Get Report

$8 billion issue sold earlier this year.

The deal's size was actually the source of some relief today. It was widely reported this week the auto manufacturer would sell $7.5 billion, before underwriters confirmed a $6.5 billion deal this morning. Investors tend to avoid buying bonds when they're anticipating a giant corporate deal (especially because these carry higher yields than Treasuries). A smaller deal means they'll have more room in their portfolio -- for all kinds of bonds.

"That's at the lower end of the expected $6 billion to $10 billion range, and less than the whispered $7.5 billion, so there's some relief that it's not going to overswamp the market," said Charles Reinhard, market strategist at

ABN Amro

. "Supply in one sector affects the others."

Some of today's positive activity was generated by unwinding of corporate rate-lock trades, two sources said. When underwriters prepare to sell a corporate deal, they'll sell Treasury bonds as a way of offsetting the risk of holding the corporate paper. Once the deal is sold, the dealers can buy back the Treasury bonds.

This reversal typically takes place after the corporate or agency offering is sold (such as Freddie Mac). But two sources linked some of the activity to the Ford offering, though it hasn't been priced yet. Part of the reason for this is the hefty demand for the deal -- sources said this issue has already been oversubscribed, which indicates that there's more than $6.5 billion worth in interest from investors.

"Knowing there's solid demand, they might have

originally hedged for a larger deal," said Reinhard.

Treasuries were actually hit hard in the morning -- at one point the 30-year bond was off by 20/32, just after the release of weekly

initial jobless claims

. Unemployment claims fell another 6,000 to 294,000 for the week ended July 2. "The market's going to chop around for a week or so until we get the

retail sales

and the CPI (

Consumer Price Index

) reports," said Larry Berman, technical analyst at

CIBC World Markets

. Those reports will be released Wednesday and Thursday.

Weakness in European bond markets cut into the market in the morning, as dealers marked down Treasury bonds in sympathy with the European losers, similar to the last two days. But the German Bund market bounced at the end of its session, and Treasuries moved up in tandem.