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US Bond Market: Yankee dawdle sped by Fed

Players in the yankee market heaved a collective sigh of relief when the fed funds rate was increased. Following a near-record year in 1996 there were just 11 public yankee issues in February and March. The reason ­ they had been waiting for the Federal Open Market Committee move which came at last on March 25.

Not that there was much expectation of the bottom dropping out of the yankee market. "If rates do increase, any effect on the yankee sector will be no different to that experienced by the domestic US bond market," said Chuck Mounts, head of international banking research at UBS, at the beginning of February. The day before the Fed increased rates by 25 basis points, Mounts reiterated his stance: "A 25bp hike wouldn't be that big a deal for banks in the yankee sector."

And it wasn't. Apart from what one banker terms "the usual emotional reaction when rates increase", any rate rise had already been factored in. Spreads on outstanding yankees have widened across the board since February, although only by between 3bp and 8bp.

"The hesitation of some issuers was really a combination of the tentativeness of the overall market, concerns about all-in rates, and outward pressure on secondary spreads leading up to the FOMC meeting," says James Gellert, vice-president, debt capital markets, at Deutsche Morgan Grenfell.

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