Treasuries Washed Out as Corporate Tap Gushes

It's the busiest week by one measure since September 1997
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Treasury prices retreated today amid an extraordinarily heavy slate of corporate bond issues. The intermediate portion of the Treasury curve -- five- and 10-year notes -- underperformed, as the corporate supply was concentrated in that maturity range.

"Today is all about corporate supply," said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read


The benchmark 30-year Treasury bond ended the day down 7/32 at 96 7/32, lifting its yield 2 basis points to 5.51%. And the two-year note was unchanged on the day, its yield 4.93%. But the 10-year note's yield rose by 3 basis points, as its price dropped by 6/32, and the five-year's rose by 4 basis points, as it fell 5/32.

With no market-moving economic reports on the calendar, the focus was on

Freddie Mac



Associates Corp. of North America

, a unit of

Associates First Capital


, and



. Freddie priced $3 billion of five-year notes and Associates priced a $1.5 billion five-year deal today, while



launched a $4 billion issue, to be priced tomorrow, including five-, 10- and 30-year notes.

The deals constitute the bulk of the roughly $15 billion of corporate and federal agency issuance expected this week. That total is nearly double the weekly average in March of $8.2 billion, according to John Atkins, senior analyst at

Thomson Global Markets

. And this week's concentration of billion-plus deals is the largest since September 1997, Atkins said.

Ironically, the flood of issuance was triggered by the miserable performance of the Treasury market during February, which simultaneously narrowed the yield spreads between Treasuries and corporate issues. In other words, as Treasury yields were rising, the premium over Treasury yields that corporate issuers have to pay was narrowing, creating more favorable conditions for them. That happens because rising Treasury yields convince investors that the economy -- and therefore corporate issuers -- is in very good shape. "The February move higher in rates answered a lot of questions and soothed a lot of uncertainty," Atkins said. "Spreads came in as much as Treasury yields rose, which made the footing for corporate issuers a lot more stable."

With Treasuries widely perceived to be rangebound, appetite for higher-yielding corporate issues is strong, said

Ken Logan

, managing analyst at Thomson. "It's definitely a strategy out there to have a predilection for spread product over Treasuries."

Still, the appetite was no match for today's feast, and Logan estimated that at the end of the day, a quarter of the fresh corporate supply remained on dealer shelves, prompting selling of comparable-maturity Treasuries to hedge the risk of holding the corporates.

Hedging of a corporate position may have been the motive for a large sale of Treasury futures at the

Chicago Board of Trade

in the last hour of trading, which subsequently pulled the long bond down from unchanged. Warburg Dillon Read's Mahoney said a dealer sold 6,000 contracts, 1.7% of average daily volume of about 350,000 contracts. "They must have had a corporate trade to do," he said.

The underperformance of the intermediate sector can also be linked to the upcoming quarterly refunding, Logan said. In the quarterly refunding the Treasury sells fresh five-, 10- and 30-year notes and bonds, except in May, when it sells only the five- and 10-year issues. For that reason, Logan said, the intermediate maturities can be expected to underperform in the days leading up to the refunding annoucement on May 5 and the refuding itself on May 11-13.

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