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Market Commentary

Market Commentary

January 15, 2015
10-YEAR NOTES   103-29 (+12.5)
FN 3.5% COUPON   105-08.5(+03)
SUPPORT   2.40%
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    More Americans unexpectedly filed applications for unemployment benefits last week, with Jobless Claims up to 316K vs. 294K prior (consensus 290K). The increase in unemployment applications is likely due to companies letting go of seasonal workers. Continuing Claims fell to 2424K vs. 2452K prior (consensus 2400K). PPI Final Demand continued to sink lower in December at -0.3% vs. -0.2% prior (consensus -0.4%), however excluding food and energy the index is up +0.3%. The negative headline PPI number largely reflects falling energy prices. Empire Manufacturing came in strong at 9.95 vs. -3.58 prior (consensus 5).
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Yesterday, treasuries rallied as continually sinking commodity prices, a persistently strong dollar, and speculation that the ECB will engage in QE by buying sovereign bonds smothered the outlook for inflation and hampered global economic growth. Due to the decrease in FHA MIP announced last week, we may see faster prepayment speeds in the following couple months and a mini-refinance boom to boost FHA originations. The 10-Year note rallied +14 ticks, pulling yields down -4.9 bps to press against resistance at 1.841%. The coupon stack compressed, tightening the most in 4/3.5 swap, down -4.5 ticks. MBS underperformed treasury hedges by 1-2 ticks led by the 4.0%, short term Volatility increased 4-6 ticks, and longer term Volatility declined 1/8th of a tick. The curve bull flattened to the flattest points since late 2012, with 2s10s down -0.8 bps to 134.8, pulling the 20 day average to 145.5 vs. 155.9 prior. Long-end yields fell, pulling the 30-Year bond down -2.1 bps to 2.459%. Even with the 30-Year bond at record lows, treasuries are still looking attractive to global investors looking at negative returns on sovereign debt nations such as Germany. The 30-Year current coupon declined to 2.51% vs. 2.58% prior, and the 15-Year fell -1 bps to 1.89 vs. 1.90% prior. The G2/FN swap declined 1-2 ticks in the production coupons led by a -2.0 tick decrease in the 3.5% coupon. The G2/FN 3.5% swap declined to 0-066 vs. 0-086 prior. Today, treasuries are continuing their upward climb with 2s10s +1.5 bps steeper.
This Week's Events:
01/15 Empire Manufacturing 05:30 January 5.00 9.95 -3.58 -1.23
01/15 PPI Final Demand MoM 05:30 December -0.4% -0.3% -0.2% -
01/15 PPI Final Demand YoY 05:30 December 1.0% 1.1% 1.4% -
01/15 Jobless Claims 05:30 January 10 290K 316K 294K 297K
01/15 Continuing Claims 05:30 January 3 2400K 2424K 2452K 2475K
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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