CREDIT MARKETS: Treasurys Rally Despite Positive Jobs Report

Treasurys rallied Friday even though a report showed the U.S. added 200,000 jobs in December, and corporate debt continued to outperform while the honeymoon sentiment that accompanied the new year's opening begins to fade.

After a solid start, the year is on shaky ground, Societe Generale credit strategist Suki Mann wrote in a note. He said the upbeat tone that started 2012 has been marred by "renewed headline risk and event risk coming from the periphery" in Europe.

The euro is under pressure, default insurance costs on sovereign debt are up again and "risk on has turned to risk off like the closing of a tap," all of which puts downward pressure on markets, Mann wrote.

Meanwhile, a key barometer of bond-market health, the Markit U.S. North American Investment Grade index, was off by 0.1%, signalling that nerves may even spread to corporates.

 
   Treasurys 
 

Delivering a latest blow to Treasury bond bears, the price rally pushed down the key 10-year yield below 2% again.

The yield, or the rate the U.S. government pays to borrow in capital markets, shot up to 2.049%, the highest level since Dec. 13, right after the U.S. nonfarm payrolls report showed stronger-than-forecast growth of 200,000 jobs in December.

But uncertainty on the euro zone and supportive comments from a key Federal Reserve policy maker turned the bond market around, wooing fresh buyers to scoop up bonds at cheaper levels.

"It has been instructive that the recent spate of better-than-expected US data have been relatively ignored," said Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney.

In late-afternoon trade, the benchmark 10-year note was 9/32 higher to yield 1.961%. The 30-year bond was 18/32 higher to yield 3.030%. The two-year note was flat to yield 0.260%. Bond prices move inversely to their yields.

 
   Investment-Grade Corporates 
 

The U.S. new-issue market was dominated by Bank of Montreal (BMO, BMO.T). BMO sold $1.5 billion in new five-year notes Friday at 1.70 percentage points over comparable government debt, a yield of 2.544%, according to a person familiar with the offering.

That was in line with official guidance, but inside the whispered price earlier this session of 1.75 percentage points.

The offering caps a week in which $11.5 billion of bond issuance from financial institutions had already priced, putting it on track to be the busiest week for these issuers since the middle of July 2011.

BMO led the sale itself alongside Goldman Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM) and Morgan Stanley (MS), and proceeds will be used for general corporate and funding purposes.

The 2.5% notes are rated Aa2 by Moody's Investors Service and A-plus by Standard & Poor's.

 
   Junk Bonds 
 

Chesapeake Midstream Partners L.P. (CHKM) sold $750 million of new 10-year notes, pricing them at a risk premium of 4.18 percentage points over comparable government debt for a yield of 6.125%, according to a person familiar with the sale.

The sale, via funding arm CHKM Finance Corp., was increased by $150 million from a planned $600 million deal.

The senior unsecured notes come due for repayment on July 15, 2022, and were rated Ba3 by Moody's Investors Service and BB-plus by Standard & Poor's.

The notes can't be bought back by the natural-gas provider for the first five years of their life, and at their first call date can be redeemed at par, or 100 cents on the dollar, plus half of their 6.125% coupon--in other words, 103.063 cents on the dollar.

Proceeds will be used to repay borrowings under the company's revolver and for general partnership purposes, according to a company press release.

Separately, Icahn Enterprises LP sold $500 million of senior notes in an add-on of its series due January 2018 at 8%. The notes were rated Ba3 by Moody's and BBB-minus by S&P.

 
   Municipal Bonds 
 

Anemic supply and January reinvestment cash continued to push the prices of top-rated municipal bonds higher, with debt maturing between 2025 and 2031 gaining most, according to a benchmark scale from Thomson Reuters Municipal Market Data.

Bonds maturing between 2025 and 2031 saw yields fall 6 basis points. Prices rose across the curve, except for debt maturing between 2013 and 2017, which held steady.

There were no major new deals Friday, said Randy Smolik, senior market analyst at Thomson Reuters. Janney put next week's new issue at about $4 billion, higher than this week's figure of about $500 milllion.

"The supply situation tends to lighten up in the second or third week of December and remains so until the end of January," said Michael Pietronico, CEO of Miller Tabak Asset Management.

On Ipreo's negotiated calendar for next week, Orange County, Calif., is set to sell $240 million in taxable pension-obligation bonds. Illinois will also competitively sell $800 million in general-obligation bonds.

Also, Moody's cut the general obligation bond rating of Illinois to A2 from A1.

 
   Mortgages 
 

Mortgage-backed securities supported by loans that have been difficult to refinance lagged Treasurys as investors continued to price in greater chances the U.S. will break down barriers to refinancings, which trigger return-damaging principal prepayments. The drumbeat of U.S. and Federal Reserve comments hasn't roiled the MBS market, but kept investors on edge, said an analyst at a primary dealer.

New York Fed chief William Dudley on Friday kept the speculation alive as he advocated "additional housing policy interventions," including ways to reduce obstacles to refinancing. Fannie Mae 5% MBS underperformed falling Treasurys by about 1/32, according to Credit Suisse.

MBS supported by new loans, such as bonds paying 3.5% interest, fared better as investors saw them as safe from refinancing and also the target of Fed purchases. This helped shrink the gap between Fannie Mae's current coupon MBS and 10-year Treasury note yields to by 7 basis points to about 84 basis points, the lowest since May.

-By Mike Cherney, Dow Jones Newswires, 212-416-3163, [e-mail]

--Katy Burne, Al Yoon and Min Zeng contributed to this article.