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Market Commentary

Market Commentary

January 13, 2015
10-YEAR NOTES   102-24.5 (-08)
FN 3.5% COUPON   104-30(-02)
SUPPORT   2.40%
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  NFIB Small Business Optimism reached the highest point since October 2006, up +2.3 Points in December to 100.4. December's gain is broad based with 8 of 10 components advancing, led by expectations for higher sales. The U.S. Treasury Monthly Budget Report for November showed continued decline in the deficit, to $178.5 Billion for a 21% decrease YoY.
  Yesterday, treasuries rallied as oil sank another -3.7% to $46.56 (lowest since 2009), lowering the outlook for inflation and fueling speculation that the Fed may delay rate hikes. Another factor supporting treasuries is speculation that the European Central Bank may initiate a QE program at their January 22nd General Council Meeting in order to curb the downward trend in Eurozone inflation (CPI has been declining since 2011). Due to the decrease in FHA MIP announced last week, we may see faster GN prepayment speeds in the following months and a mini-refinance boom to boost originations. The 10-Year note rallied +17 ticks, pulling yields down -5.9 bps to flirt with resistance at 1.911%. The coupon stack was mixed, widening in the lower coupons and tightening in the higher coupons; the stack imbalance is likely due to less production in the higher coupons into the rally. MBS underperformed treasury hedges by 2-7 ticks with the lower coupons outperforming the higher coupons. The curve bull flattened, with 2s10s down -3.5 bps to 136.0, pulling the 20 day average to 147.3 vs. 158.6 prior. Long-end yields fell, pulling the 30-year bond down -5.6 bps to 2.499%. The 30-Year current coupon declined -6 bps on the day, closing at 2.61% and the 15-Year came in flat at 1.93%. The G2/FN swap declined 3-6 ticks in the production coupons led by a -5.25 tick increase in the 3.5% coupon. The G2/FN 3.5% swap declined to 0-08 vs. 0-132 prior.
There is a $21 Billion 10-Year Note auction at 10:00 AM (PST).
This Week's Events:
01/13 Monthly Budget Statement 11:00 December $3.0 Billion - $53.2 Billion -
01/14 MBA Mortgage Applications 04:00 January 9 - - 11.1% -
01/14 Retail Sales Advance MoM 05:30 December -0.1% - 0.7% -
01/14 Import Price Index MoM 05:30 December -2.7% - -1.5% -
01/14 Import Price Index YoY 05:30 December -5.2% - -2.3% -
01/15 Empire Manufacturing 05:30 January 5.00 - -3.58 -
01/15 PPI Final Demand MoM 05:30 December -0.4% - -0.2% -
01/15 PPI Final Demand YoY 05:30 December 1.0% - 1.4% -
01/15 Jobless Claims 05:30 January 10 290K - 294K -
01/15 Continuing Claims 05:30 January 3 2401K - 2452K -
01/16 CPI MoM 05:30 December -0.4% - -0.3% -
01/16 CPI YoY 05:30 December 0.7% - 1.3% -
01/16 Industrial Production MoM 06:15 December -0.1% - 1.3% -
01/16 Capacity Utilization 06:15 December 79.9% - 80.1% -
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