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Market Commentary

Market Commentary

January 21, 2015
10-YEAR NOTES   104-03.5 (-00.5)
FN 3.5% COUPON   104-31 (-02)
SUPPORT   2.40%
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  MBA Mortgage Applications rose +14.2% last week vs. +49.1% prior. Purchases  fell -1.0% vs. +17.4% prior (-3.2% YoY), Refinancing rose +57.4% vs. +25% prior (+10.2% YoY), and the average interest rate for a conventional 30-Year fixed fell to the lowest since May 2013 at 3.80% vs. 3.89% prior. Refinances made up 73.9% of loans last week vs. 70.5% in the week prior. Housing picked up in December, up +4.4% after dipping -1.6% in November (consensus +1.2%). Single-family Housing Starts increase +7.2% in December to the highest level since March 2008. Building Permits slipped -1.9% (MoM), following a -3.7% (revised up from -5.2%) decline in November (consensus +0.8%).
   Moody's lowered Russia's credit rating to Baa3, the lowest investment grade, and many fear that it will slip even further into junk bond territory. Russia's economy has been struggling under the weight of the sanctions imposed upon them and a weakening currency, and in response we continue to watch for increased demand for safe haven assets as investors retreat Russia's markets. Eurozone CPI slipped into negative territory for December, adding to the recent string of weak data coming out of the area. The combination of negative CPI inflation in the Eurozone and anemic economic growth makes it likely that the European Central Bank will launch a program to purchase sovereign bonds at tomorrow's meeting in order to spur inflation and economic growth.
    Yesterday, the 10-Year note rallied +4 ticks, pulling yields down -1.6 bps to flirt with resistance at 1.801%. The coupon stack finished the day mostly flat to the prior day's close with a slight tightening in the 4.5/4 swap of +1 tick. MBS underperformed treasury hedges by 1-5 ticks led by the 3.0% (5 ticks wider), short term Volatility declined -0.16 bps, and longer term Volatility declined -0.18 bps. The curve bear flattened, with 2s10s down -2.2 bps to 131.8, pulling the 20 day average to 142.3 vs. 152.6 prior. Long-end yields fell, pulling the 30-Year bond down -3.3 bps to 2.404%. 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 and Switzerland. The 30-Year current coupon increased to 2.58% vs. 2.56% prior, and the 15-Year rose +3 bps to 1.93 vs. 1.90% prior. The G2/FN swap declined 1-3.25 ticks in the production coupons led by a -3.25 tick decrease in the 3.0% coupon. The G2/FN 3.5% swap declined to 0-01 vs. 0-022 prior. Today, treasuries are trading near session highs in response to the mixed Housing Starts/Building Permits data and the curve has bear flattened with 2s10s down -3.1 bps with yield on the 10-Year note pressing resistance at 1.79%.
This Week's Events:
01/21 MBA Mortgage Applications 04:00 January 16 - 14.2% 49.1% -
01/21 Housing Starts 05:30 December 1040K 1089K 1028K 1043K
01/21 Housing Starts MoM 05:30 December 1.2% 4.4% -1.6% -4.5%
01/21 Building Permits 05:30 December 1060K 1032K 1035K 1052K
01/21 Building Permits MoM 05:30 December 0.8% -1.9% -5.2% -3.7%
01/22 Jobless Claims 05:30 January 17 300K - 316K -
01/22 Continuing Claims 05:30 January 10 2400K - 2424K -
01/22 FHFA Home Price Index MoM 06:00 November 0.3% - 0.6% -
01/23 Existing Home Sales 07:00 December 5.08 Millions - 4.93 Millions -
01/23 Existing Home Sales MoM 07:00 December 3.0% - -6.1% -
01/23 Leading Index 07:00 December 0.4% - 0.6% -
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