The 10 year treasury ending last week at 2.74% was something that we would have never expected. The benchmark treasury ended the prior week at 2.85%. The range for last week was 2.74% to 2.85%. The drop in rates makes one wonder whether there is a large financial institution, somewhere on the globe, in trouble as the data does not seem to justify the rate fall.
The fall in interest rates coincided with the 3rd reading on GDP being raised to 2.9% from 2.5% previously. Additionally the pending home sale index beat estimates and consumer confidence remained at lofty levels–doesn’t seem like rates should be falling.
The treasury had to raise a huge amount of money last week with sales of notes bumping up toward $300 billion. Some auctions had bid-to-cover ratios that were the lowest in 2 years, while others of shorter duration had strong bidding. All of this activity took place as the Federal Reserve had no runoff of debt on the balance sheet (one has to change the chart settings to 3 months to see the recent activity). We do note that the Fed has treasury holdings of $30 billion maturing in the next 15 days and $89 billion maturing in the next 90 days which means that they have all the opportunity right before them to let the runoff occur–we will have to see what they do.
It is interesting that the average preferred stock and baby bond fell in price last week closing at $25.04 from $25.14 the previous week. While it would appear that investors are demanding higher yield it is really just simply the fact that the end of March (as well as June, September and December) is the #1 time for these securities to go ex-dividend (per our database which is not yet fully visible to readers). There are now 201 preferred stocks trading under $25/share compared to 191 the week before.
Last week we had 2 income issues priced. Allstate Corporation priced a new non cumulative preferred at 5.625% and it is now trading on the OTC Grey market under the temporary ticker of ALLSP at $25.08. Partnership Landmark Infrastructure Partners (NASDAQ:LMRK) priced a new unique issue that is convertible Floating to Fixed rate (versus the typical fixed to floating) with an initial coupon of the greater of 3 month libor plus 4.698% or 7%. The issue goes to a fixed rate of 9% in 2025 (as one reader observed they would intend to redeem the issue prior to the 9%). The issue has traded weakly between $23.75 and $24.50. As noted before any issue with a K-1 attached to it has tended to trade weakly.
WR Berkley (NYSE:WRB) priced a baby bond the week before at 5.70% (NYSE:WRB-E), but this issue has still not traded but should begin anytime now.
For the coming week the biggest economic release will be the employment situation report on Friday which is preceded by the ADP employment report on Wednesday. The consensus is for a meager 167,000 new jobs with the unemployment rate falling to 4% from 4.1%–we shall see if this has an affect on the marketplace.
Maybe the larger items for the week will some treasury bill auctions on Monday followed by announcements of funding needs and auctions for the immediate future by the treasury. I think we can expect (and the marketplace likely expects) frequent, big auctions throughout the year.
Of course we have the typical 4 different Fed presidents speaking giving 5 speeches this week–sure to advocate conflicting positions, leaving the marketplace with no real new information.
The coming week holds much intrique for us as we will be kind of surprised if interest rates fall further, but only God knows for sure what will occur.