CREDIT MARKETS: Risk Trade Turned Off, Corporates Still Tap Market

NEW YORK (Dow Jones Nov 17, 2011 excerpt)--Treasury and municipal bonds rallied Thursday as fears of European contagion spread despite renewed buying efforts from the European Central Bank.

"Fear is beginning to give way to panic as European policymakers have failed to adequately ring-fence the crisis," said economists at TD Securities, noting multiple sovereign yields have reached or are nearing euro-area highs. "An uncontained escalation in the European debt crisis will almost certainly push the region into a deep recession, and will undoubtedly take the global economy down with it."

Risky assets, including mortgage-backed securities, sold off. High-grade corporate borrowers, still hoping to access the credit markets before a holiday slowdown and the potential for continued headline risks, were able to ride the flight to safe havens and issue new debt.

 
   Treasurys 
 

Investors flocked to Treasury bonds Thursday as fears about Europe's debt crisis infecting the banking system intensified.

The spike in anxiety comes on growing signs that the region's banks are finding it more difficult and more expensive to get a hold of funding.

The U.S. two-year swap spread--a key credit risk metric measuring the difference between the two-year swap rate and two-year Treasury yield--expanded 2.25 basis points to 53 basis points, the highest since June 2009.

The cost of swapping euros into dollars--another much-watched indicator for signs of stress in the funding market--has widened to levels last seen in December 2008, while short-dated Eurodollar futures point to a rise in three-month dollar Libor, signaling stress in the interbank funding market.

Although the consequences banks are suffering as a result of Europe's unmanageable sovereign debt loads haven't completely halted daily flows, contagion fears are keeping investors on edge and, as a result, the U.S. government debt market well supported.

By late-afternoon trading, benchmark 10-year notes rose 19/32 in price to yield 1.957%--bobbing back below the psychologically key 2% point. Two-year notes shed 1/32 to yield 0.270%, while 30-year bonds gained 19/32 to yield 2.977%. Bond prices move inversely to yields ....

 
     Municipal Bonds 
 

Prices of top-rated municipal bonds largely rallied Thursday, buoyed by strength in Treasurys and as a record amount of weekly supply continued to see good reception.

Yields on triple-A munis maturing beyond 2014 generally fell between one to five basis points, with the most strength in bonds maturing in 2018 through 2020, a benchmark scale from Thomson Reuters Municipal Market Data showed. Yields on bonds maturing in 2012 through 2013 as well as 2025 through 2035 were flat. Prices and yields move in opposite directions.

In the primary market, Hawaii finished the sale of $1.3 billion in general obligation debt, opening bidding Thursday to institutional investors. Yields on the deal were lowered as much as nine basis points, compared with levels offered earlier in the morning, one market participant said. The longest maturity, in 2031, offered a coupon of 4% and a yield of 4%, a term sheet showed.

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