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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: N who wrote (64)	2/16/2000 11:56:00 AM
From: John Pitera	Read Replies (2) \| Respond to of 33421

Hi Nancy, it's funny to see Bill Gross comments about moving the market -g- A number of firms have commented that they are using the 10 Yr note to price other debt. There is still some question about how this will work with really long-dated commitments of say insurance companies. John ----------------------- February 4, 2000 J.P. Morgan Adopts 10-Year Note As Long-Term Debt Benchmark By CAROL S. REMOND and JOE NIEDZIELSKI Dow Jones Newswires J.P. Morgan said it will use the 10-year Treasury note to value long-term corporate bonds instead of the 30-year bond, which has ruled as the main pricing benchmark since the 1970s. Bob Lebue, a J.P. Morgan vice president on the high-grade syndicate desk, said his firm now uses the 10-year note "to value about 75% of the sectors we trade." The syndicate official speculated that other firms on Wall Street may have already made the same decision. William Cunningham, senior bond strategist at Merrill Lynch said Thursday that it's already advising its clients to start examining pricing 30-year corporate debt off the 10-year. J.P. Morgan's move comes as the U.S. Treasury scales back issuance of long-term debt amid the nation's booming economy and strong budget surplus. Mr. Lebue said the move away from the long bond as a key yardstick was intended to provide investors with a "positive sloping yield curve on a relative basis." He also said that his firm is "now using the 10-year as a reference point to then value the credit differential between the 10-year and the 30-year," effectively "eliminating the interest component in the valuation of the bonds." J.P. Morgan's adoption of the 10-year note as a benchmark comes as expectations for a diminished supply of 30-year U.S. Treasurys have exacerbated the unusual inversion in the interest rates between shorter- and longer-term maturities, making it difficult for investors and dealers to value corporate and emerging market bonds. "We wanted to take a position of providing some credibility on relative value to the market," J.P. Morgan's Mr. LoBue said. Amid speculation that other Wall Street dealers will likely follow J.P. Morgan's lead, Dan Noonan, a spokesman for Salomon Smith Barney, a unit of Citigroup, confirmed that his firm also had made the jump to the 10-year note. Mr. Noonam couldn't immediately say how much of Salomon's corporate activities were affected. Salomon and Goldman Sachs Group are joint book runners on Vodafone Airtouch's $5 billion three-part global bond deal which is expected to price Monday. The offering is seen as setting a precedent in the market since Vodafone's $2.5 billion 10-year tranche and $1 billion 30-year are expected to both be priced over the 10-year note. Goldman Sachs wasn't able to immediately confirm that it also had adopted the 10-year as a gauge to value long-term corporate debt. A spokesman for Chase Manhattan, meanwhile, said the firm hadn't made any formal decision but that it was exploring alternatives, including adopting the 10-year note or the interest-rate swaps curve as new benchmarks. Officials at Lehman Brothers and Morgan Stanley Dean Witter didn't immediately return phone calls. Market participants also said changes in the corporate market will soon cross over to other types of debt. "If the 10-year becomes the benchmark for other sectors, it will become the benchmark here," predicted William Nemerever, who manages about $1 billion in emerging-market debt for Boston-based Grantham Mayo Van Otterloo Co. J.P. Morgan's Mr. LoBue agreed. "We all price over similar Treasury benchmarks. I believe that (the) emerging market (desk) will consider the same approach," he said.