Weak bond auction causes market sell-off

Dow dropped 102, decliners over advancers 2-1 & NAZ was down a big 42 (2.4%). Banks were generally weak. But the main one getting attention, Bank of America (BAC), rose 82¢.

S&P 500 FINANCIALS INDEX

Value 162.34

Change -5.80

% Change -3.4%

The Treasury sold $14B in 30 year bonds at a yield of 4.29% (6 month high yield), 10 basis points above the 4.19% expected. The auction’s bid-to-cover ratio was 2.14X, compared with an average of 2.24X at the last 10 sales of the maturity. At the last sale on Mar 12, this bond yielded 3.64%. The 10 year Treasury bond yield rose 14 basis points to 4.30%, giving yesterday's bond buyers at auction an immediate loss. This yield is especially important, it's the basis for many mortgage rates which have been ticking up recently (from record low rates). Goldman Sachs estimates the gov will have to borrow an additional $3¼T (in numbers, that's:
$3,250,000,000,000) this year.

The Federal Reserve could resume buying Treasury bonds. This week it completed two buyback operations, bringing the total U.S. debt it has acquired to $92.2B through 16 purchases. The FED said in March it will buy as much as $300B in Treasury bonds to lower consumer borrowing costs.

Treasury Yields Touch 5-Month Highs Before Stress Tests


There is caution in the air about the junk bond rally. Junk bonds are up 39% in the last 2 months, but they haven't hit the rough patch yet & it's coming. Moody's is forecasting the default rate could be 15%, up from an estimate of 8% last month. Junk bond funds were mixed today, but the Barclay's index was down 50¢ to yield 15%. That yield had been 17% a couple of weeks ago.

•`Premature' Junk-Bond Rally Prompts Strategists to Warn of Rising Defaults


The Alerian MLP Index lost 2.85, taking it below 212, but still in yearly high territory. The REIT index fell 9, hurt by Simon's loss (discussed below). Meanwhile VIX popped 2 to the 34s, but near low levels for this year. Oil pulled back from earlier gains, influenced by the market sell-off, up only pennies in the 56s.


Simon Property (SPG) increased the size of its stock offering, down 2.79 to 52.05. Yesterday it announced it would sell 14M shares, today the stock sale was increased to 20M at 50 for $1B. This is their version of satisfying their own stress test standards. More than 20 REITs have sold stock in the last 2 months, raising $8½B to prepare themselves for tougher times ahad & for possible buying opportunities.

Simon Boosts Size of Offering, May Raise $1 Billion


Everybody is waiting for stress results to be released. Much of the news has already been leaked, so there should be no great surprises. But sometimes just announcing what is expected can have a significant effect on markets.