October 15, 2003

BED Spread Fixing to Narrow Again...

Tomorrow I update the BED spread numbers for the weekly edition of SI, but I'm guessing it will have narrowed again on this kind of news. Brazil's debt getting upgraded at the same time that long-term mortgage rates are rising in the U.S. is exactly the kind of convergence I expected to see when I debuted the BED spread. Of course, rising bond yields in the U.S. might also be explained by investors dumping bonds and moving into stocks to ride the wealth reflation wave. Rising yields aren't strictly a function of the rate of return the market demands to loan money to risky borrowers. But in this case, you can take your pick when it comes to explaining falling bond prices. As I mentioned a few weeks ago, the best way to play rising yields is to buy calls on TNX (up 1.6% today) which is a multiple of the current yield on the 10-year treasury, or to buy puts on bond prices via IEF, the Lehman basket of bonds that imitates ten-year bond prices (down 3% since October 1st). Bloomberg.com: Latin America: "Brazil Bonds, Stocks, Currency Rise on Credit Rating Outlook Oct. 14 (Bloomberg) -- Brazil's benchmark bond climbed to a record and stocks and the currency rose on speculation an upgrade of the nation's credit rating is imminent. Brazil's 8 percent bond due 2014, the most-traded emerging- market security, gained 1 cent on the dollar to an offer price 94.69, cutting the yield to 9.34 percent, according to J.P. Morgan Chase & Co. at 4:18 p.m. in New York. The real climbed to its strongest level against the dollar in three months and the Bovespa stock index rose to a three-year high. The gains, a year after the nation's bonds and currency tumbled on investors concerns Brazil might default on its debts, underscore President Luiz Inacio Lula da Silva's ability to restore confidence by cutting spending and reining in inflation. Speculation that Brazil's B2 credit rating will be lifted increased after Moody's Investors Service's decision last week to raise Russia's rating to investment grade. "


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